of  California 
•n  Regional 
y  Facility 


THE  LIBRARY 

OF 
THE  UNIVERSITY 

OF  CALIFORNIA 
RIVERSIDE 

GIFT  OF 

Dr.  fcate  Gordon  Moore 


PRINCIPLES 


OF 


POLITICAL  ECONOMY 


BY 


SIMON  NEWCOMB,  Pn.D.,  LL.D. 

PROFESSOR  OF  MATHEMATICS,  U.  8.  NATY ;   PROFESSOR  IN  THE  JOHNS  HOPKINS  UNIVERSITY 


NEW   YORK 
HARPER    &    BROTHERS,    FRANKLIN    SQUARE 

1886 


Copyright,  1885,  by  HARPER  &  BROTHERS. 
All  rights  reserved. 


PREFACE. 


THE  following  work  is  intended  to  embody  an  exposition  of 
those  principles  of  economic  science  which  must  be  mastered 
by  every  one  who  would  form  an  intelligent  judgment  of  the 
causes  which  influence  the  public  well-being.  The  main  im- 
provement which  the  author  has  attempted  is  the  presentation 
of  the  subject  in  a  scientific  form  as  an  established  body  of 
principles.  It  has  seemed  to  him  that,  from  a  scientific  stand- 
point, the  most  unsatisfactory  feature  of  the  current  teaching 
of  economics  is  the  presentation  of  too  many  opposing  views 
and  arguments.  He  has  endeavored  to  exclude  all  mere  views, 
and  substitute  independent  investigation  for  argument.  "Where 
investigation  leads  to  a  positive  result,  that  result  is  stated  in 
the  form  of  a  point  gained  ;  where  the  result  is  still  uncertain, 
the  deficiency  is  pointed  out,  with  hints  of  what  new  knowl- 
edge is  wanting  to  supply  it.  It  is  hoped  that  the  principles 
laid  down  in  the  first  four  books  will  be  accepted  by  all  who 
understand  the  subject  as  forming  a  well  -  ascertained,  even 
if  limited,  body  of  doctrine.  The  very  fact  that  the  proposi- 
tions are  well  established  leads  to  their  being  reached,  not  by 
dogmatic  statements,  but  by  courses  of  thought  which  leave 
the  reader  free  at  every  step  to  compare  the  ideas  presented 


iv  PREFACE. 

to  him  with  all  the  facts  he  may  have  learned  from  observa- 
tion. 

The  author  takes  a  more  hopeful  view  of  the  future  develop- 
ment of  economics  than  that  commonly  found  in  current  dis- 
cussion. He  holds  that  nothing  is  needed  to  give  the  subject 
a  recognized  place  among  the  sciences  except  to  treat  and 
develop  it  as  a  science.  Of  course  this  can  be  done  only  by 
men  trained  in  the  work  of  scientific  research  and  at  the  same 
time  conscious  of  the  psychological  basis  on  which  economic 
doctrine  must  rest.  To  such  investigators  a  most  interesting 
and  hopeful  field  of  research  is  opened  in  the  study  of  the  laws 
growing  out  of  the  societary  circulation.  If  the  same  amount 
and  kind  of  research  which  have  been  applied  to  the  develop- 
ment of  the  laws  of  electricity  were  applied  to  this  subject, 
there  is  every  reason  to  suppose  that  it  would  either  settle 
many  questions  now  in  dispute,  or  would  at  least  show  how 
they  were  to  be  settled. 

In  order  not  to  obliterate  in  the  mind  of  the  reader  the  dis- 
tinction between  the  scientific  and  the  practical  sides  of  the 
subject,  all  questions  of  public  policy  have  been  condensed  into 
the  concluding  book.  Here  the  author  has  allowed  himself 
more  freedom  of  discussion  and  treatment  than  elsewhere,  but 
still  encourages  the  reader  to  reach  his  own  conclusions  by  his 
own  methods  of  thought.  This  book  would  have  been  entirelv 

O  « 

omitted,  as  detracting  from  the  purely  scientific  character  of 
the  work,  were  it  not  that  applications  of  a  science  are  essential 
to  a  good  mastery  of  its  first  principles.  The  author  trusts  that 
little  or  nothing  of  a  partisan  character  will  be  found  even  here, 
and  that  the  student  will  leave  the  subject  with  a  feeling  that 
he  must  rely  upon  his  own  investigations  for  his  practical  con- 
clusions. 


PREFACE.  v 

Fossil)1}*  some  apology  may  be  needed  for  the  very  elemen- 
tary and  perhaps  fragmentary  outline  of  logical  method  in 
science  \vhich  forms  the  bulk  of  the  first  book.  This  outline 
was  suggested  by  the  belief  that  much  of  the  confusion  and 
difficulty  -which  surround  the  subject  arise  from  want  of 
insight  into  the  true  significance  and  use  of  scientific  proposi- 
tions. The  author  hopes  that  it  will  aid  the  student  in  seeing 
the  relation  between  the  logical  and  the  practical  sides  of  the 
subject,  and  in  making  each  of  these  sides  help  the  other. 

The  general  scope  of  the  work  has  been  determined  by  the 
principle  of  condensing  into  it  that  which  is  most  valuable  to 
the  student  in  the  sense  of  combining  utility  with  difficulty  of 
acquirement.  He  holds  that  the  great  want  of  the  citizen  who 
is  to  exercise  an  important  influence  upon  the  policy  of  the 
nation  is  understanding  rather  than  knowledge.  The  latter  he 

o  o 

will  be  sure  to  acquire  by  his  experience  of  the  world,  whether 
he  is  or  is  not  educated  ;  but  it  will  be  barren  of  results  with- 
out guiding  principles  by  which  to  interpret  and  arrange  the 
facts  he  observes.  On  the  other  hand,  a  command  of  prin- 
ciples requires  a  course  of  training  and  study  which  can  seldom 
be  undertaken  with  success  after  one  has  entered  upon  the 
serious  business  of  life.  It  has  therefore  the  highest  elements 
of  value  to  the  student.  It  is  hoped  that  the  student  who  has 
mastered  the  first  four  books  of  the  following  work  will  feel 
able  to  proceed  intelligently,  either  in  the  study  of  more  ad- 
vanced branches,  or  in  the  explanation  of  those  economic 
phenomena  which  will  be  of  daily  occurrence  in  the  course  of 
his  active  life. 

The  questions  found  at  the  ends  of  some  chapters  are 
intended  as  exercises  in  applying  the  teachings  of  the  chap- 
ters preceding  them,  and  may  serve  to  test  the  student's  com- 


Vi  PREFACE. 

mand  of  the  subject.  Some  of  them  may  afford  material  for 
extended  class  discussion.  In  the  conduct  of  such  discussions 
a  danger  is  to  be  guarded  against.  If  they  lead  the  student 
into  the  habit  of  arguing  rather  than  investigating,  they  may  do 
him  more  harm  than  good.  It  is  essential  that  he  should  see 
in  each  case  what  the  point  at  issue  really  is,  and  should  be 
taught  to  recognize  and  avoid  that  large  and  alluring  class  of 
questions  in  which  there  is  no  point  at  issue. 

How  far  the  work  can  be  regarded  as  an  original  contribu- 
tion to  economic  science  is  to  be  determined  by  the  critical 
reader.  It  may  not,  however,  be  inappropriate  to  indicate  one 
or  two  points  in  which  it  has  seemed  to  the  author  that  the 
existing  form  of  the  subject  admitted  of  improvement.  He 
conceives  that  in  current  economic  literature  there  is  a  triple 
confusion  of  things,  with  rights  of  property  in  things,  and  with 
the  written  evidences  of  those  rights  of  property.  This  sub- 
ject he  has  discussed  in  connection  with  the  conceptions  of 
wealth,  capital,  and  money. 

He  has  also  felt  the  want  of  names  for  certain  general  con- 
cepts, among  which  the  following  may  be  mentioned : 

A  name  for  everything  which  men  receive  in  return  for  money 
paid,  whether  it  be  wealth  transferred  or  services  rendered. 

A  general  name  for  that  which  is  transferred  in  payment, 
whether  it  be  money  or  credit. 

A  general  term  to  express  those  operations  of  industry  and 
commerce  whereby  human  wants  are  satisfied,  comprising  pro- 
duction, transportation,  and  transfers  of  ownership. 

He  has  deemed  it  proper  to  leave  to  higher  authorities  the 
task  of  supplying  this  nomenclature,  though,  as  the  reader  will 
notice,  he  has  felt  obliged  to  use  several  existing  terms  in  a 
much  wider  sense  than  that  commonly  assigned  them. 


TABLE  OF  CONTENTS. 


BOOK  I. 

LOGICAL    BASIS  AND   METHOD    OF    ECONOMIC 

SCIENCE. 

PAGE 

CHAPTER  I.  Introductory  View  of  the  /Subject 3 

1.  Objects  of  human  activity.  2.  The  social  organism.  3.  Moving 
force  of  the  social  organism.  4.  The  law  of  labor.  5.  Origin 
of  the  social  feature.  6.  Limitations  upon  the  conception  of 
an  organism. 

CHAPTER  II.   Definition  of  the  Field  of  Political  Econ- 
omy       10 

7.  The  sciences  growing  out  of  human  desires.  8.  Illustrations. 
9.  Definitions  of  economics. 

CHAPTER  III.  Of  Scientific  MetJwd 14 

10.  "What  scientific  method  is.  11.  The  problem  of  scientific  meth- 
od. 12.  Form  of  general  propositions.  13.  Induction  and  de- 
duction. 14.  Succession  of  cause  and  effect.  15.  Abstraction. 
16.  Pure  and  applied  science. 

CHAPTER  IV.  Special  Features  of  Economic  Method. ...     22 

17.  The  foundation  of  economics  in  human  nature.  18.  Funda- 
mental hypotheses.  19.  The  deductive  method.  20.  Requi- 
sites for  the  deductive  method.  21.  Limitations  on  our  knowl- 
edge of  the  fundamental  data.  22.  The  law  of  averages. 
23.  Unknown  economical  causes.  24.  Summary  of  results. 


CONTENTS. 

PAGE 

CHAPTER  V.  Fallacious  Views  of  Economic  Method. ...     32 

25.  Example  of  misinterpretation.  26.  The  doctrinaire's  error. 
27,  28.  The  popular  error.  29.  Illustration  of  the  popular 
error.  80.  Comparison  of  economics  with  meteorology. 
81.  The  scientific  spirit.  Illustrations  and  exercises. 


BOOK  II. 

DESCRIPTION  OF  THE  SOCIAL  ORGANISM. 

DIVISION  A.— DEFINITIONS  AND  OUTLINE. 

CHAPTER  I.  Of  Wealth  and  its  Associated  Concepts 47 

1  Remarks  on  economic  nomenclature.  2.  Labor.  3.  Wealth. 
4.  Property  or  ownership.  5.  Forms  of  ownership.  6.  Credit. 
7.  Divided  property.  8.  Difference  between  wealth  and  prop- 
erty. 9.  Transfer  of  ownership.  10.  Commodity.  11.  Capi- 
tal. Note  on  the  definition  of  the  word  property. 

CHAPTER  II.  Other  Definitions 57 

12.  Production.  13.  Transfer  of  ownership,  exchange,  barter,  pur- 
chase, and  sale.  14.  Consumption  productive  and  unproduc- 
tive. 15.  On  economic  processes.  16.  Value.  17.  Value  as 
a  mathematical  quantity.  Notes  and  exercises. 

DIVISION B.— THE  MECHANISM  OF  PRODUCTION. 

CHAPTER  III.  The  Requisites  of  Production 70 

18.  Requisites  of  production  illustrated.  19.  Of  knowledge  as  a 
requisite  of  production.  20,  21.  Classification  of  knowledge. 

CHAPTER  IV.  Of  Natural  Agents  as  Requisites  of  Pro- 
duction       77 

22.  Raw  material  and  land.  23.  Of  appropriation.  24.  Necessity 
of  right  of  property  in  natural  agents,  and  objections  to  it. 


CONTENTS.  !X 

PAGE 

CHAPTER  Y.  Of  Capital 82 

25,  26.  Distinction  between  capital  and  sustenance.  27.  Classifica- 
tion and  examples  of  capital.  28.  Fixed  and  circulating  capital. 
29.  The  function  of  capital.  30.  Capital  the  result  of  absti- 
nence. 31.  Divided  ownership  of  capital.  Questions. 

CHAPTER  VI.  Of  Labor 93 

32.  The  economic  laboring  unit.  33.  Distinction  of  laborer  and 
capitalist.  34.  Wages  of  labor.  35.  Of  the  different  kinds  of 
labor.  36.  The  modern  organization  of  labor.  37.  The  division 
of  labor.  38.  Labor-saving  machinery.  39.  Steam  transpor- 
tation. 40.  The  organizers  of  labor.  41.  Efficiency  of  the  la- 
borer. 42.  Friction  of  exchange. 

CHAPTER  VII.  The  Increase  of  Population 107 

43,  44.  Law  of  geometrical  increase.  45,  46.  Checks  upon  the 
increase  of  population.  47.  The  Malthusian  theory  of  popu- 
lation. 

CHAPTER  VIII.    Of  Fluctuations  in  Production  and 
Consumption 114 

48.  Introductory  remarks.  49.  Changes  in  the  direction  of  labor. 
50.  Competing  and  non-competing  groups.  51.  Transforma- 
bility  of  capital.  52.  Inequalities  in  economic  processes. 

CHAPTER  IX.  Production  and  Consumption  from  a  Com- 
munistic Point  of  View 127 

53,  54.  The  communistic  view.  55.  Regulations  necessary  to  the 
common  good.  56.  Conditions  of  general  prosperity. 

CHAPTER  X.  Changes  in  the  Social  Organism  with  the 
Advance  of  Society 137 

57.  Increase  of  knowledge  and  formation  of  habits.  58,  59.  Im- 
provements in  production.  60.  Increase  in  the  urban  popula- 
tion. 61.  Differentiation  and  integration.  Questions. 


X  CONTENTS. 

DIVISION  C.—THE  MECHANISM  OF  EXCHANGE. 

PAGE 

CHAPTER  XI.  Of  Money 145 

62.  Necessity  of  exchange.  63.  Requirements  of  the  medium  of 
exchange.  64.  Gold  and  silver  as  money.  65,  66.  Coinage. 
67.  Legal  tender.  68.  The  monometallic  and  bimetallic  sys- 
tems. 69.  Limited  bimetallism.  70.  The  subsidiary  coinage. 
71.  Volume  of  the  currency. 

CHAPTER  XII.  Banks  and  Credit-money 157 

72.  Nature  of  credits.  73.  How  banks  arise.  74-76.  Bank  de- 
posits and  cheques.  77.  Individual  deposits.  78.  Capital  stock. 
79.  Discount  functions.  80.  Deposits  as  currency.  81.  Bank 
circulation.  82.  Ulterior  development. 

CHAPTER  XIII.   Organization  of  Banks  in  Detail 168 

83.  Weakness  of  banking.  84,  85.  Fluctuations  of  business. 
86.  Suspension  of  specie  payments.  87-90.  The  national  bank- 
ing system.  91.  The  Bank  of  England. 

CHAPTER  XIY.  The   Clearing-house  and  Foreign  Ex- 
change    179 

92.  Functions  of  the  clearing-house.  93.  Analogy  to  exchanges  in 
society.  94,  95.  Foreign  exchange. 

CHAPTER  XY.  Conclusions  respecting  the  Volume  of  the 
Currency 187 

96.  Kinds  of  currency.  97.  Items  to  be  included  and  excluded. 
98.  Credit-money.  99.  Relation  of  bank  cheques  to  the  cur- 
rency. Exercises. 


BOOK  III. 

THE  LAWS  OF  SUPPLY  AND  DEMAND. 

CHAPTER  I.  The  Conception  of  Value 199 

1.  Conception  of  value.  2.  Relation  of  value  to  utility.  3.  Jevons's 
theory  of  value.  4.  Economic  view  of  value.  5.  Relation  of 
value  to  human  needs. 


CONTENTS.  xi 

PAGE 

CHAPTER  II.  The  Standard  of  Value 205 

6,  7.  Mathematical  conceptions.     8,  9.    Scale  of  prices.     10.   An 
absolute  standard.     11,  12.  The  tabular  standard  of  value. 


CHAFIEK  III.  The  Relation  of  Price  and  Demand 215 

13.  Features  of  a  market.  14.  The  law  of  price  and  demand. 
15.  Sensitive  and  insensitive  commodities.  16.  Reaction  of 
demand  on  price.  17.  Modifications.  18.  Equilibrium  of  sup- 
ply and  demand.  19.  Discounting  the  market.  20.  Is  the  rise 
of  price  consequent  on  increase  of  demand  temporary  or  per- 
manent? 21.  Application  to  the  purchasing  power  of  money. 
Illustrations  and  exercises. 


CHAPTER  I  Y.  Monopolized  Requisites  of  Production  .  .  .   230 

22.  Introductory  remarks.  23.  The  monopoly  element.  24.  Three 
classes  of  monopolies  distinguished.  25.  Limitations  upon 
monopolies.  26.  Temporary  monopolies.  27.  Recapitulation. 
28,  29.  Effect  of  monopolies  upon  supply  and  price.  Exer- 
cises. 


CHAPTER  Y.  The  Rent  of  Land 

30.  Opposing  views.  31.  Illustration  of  Ricardo's  theory.  32.  Fer- 
tility. 33.  Relation  of  rent  to  prices.  Exercises. 

CHAPTER  YI.  On  Competition  as  determining  Cost  .....   248 

34.  Of  competition.  35.  Of  prices  not  determined  by  competition. 
86.  Cases  where  competition  is  difficult.  37-39.  Competition 
among  business  managers. 

CHAPTER  YIL  Of  Profits  and  Cost  of  Production  ......   257 

40.  The  old  view.    41.  Gross  cost.    42.  Net  cost.    43.  Profits. 

CHAPTER  VIII.    Preservation  of  Equilibrium  letween 
Supply  and  Demand  ............................   263 

44.  The  East  India  method.  45.  Graduated  cost  of  production. 
46.  Illustrative  example.  47.  Modifications.  Questions. 


xii  CONTENTS. 

PiOE 

CHAPTER  IX.  Equilibrium  between  Supply  and  Demand 
in  the  case  of  Absolute  Monopolies 271 

48.  Review.  49.  Case  of  ownership  by  a  single  person  or  combi- 
nation. 50.  Case  of  patented  machines.  51.  Case  in  -which 
the  supply  is  absolutely  limited. 

CHAPTER  X.  International  Supply  and  Demand 278 

52,53.  Equilibrium  of  prices.  54.  Relative  advantages  of  different 
countries  in  production.  55.  Balance  of  trade  by  foreign  ex- 
change. 56.  Tax  and  cost  of  transportation.  57,  58.  Balance 
of  trade  between  two  countries.  59.  Total  balance  of  trade 
•with  all  countries.  60.  Theories  and  nomenclature  of  the  bal- 
ance of  trade.  61.  Advantages  of  international  trade.  Illus- 
trations and  exercises. 

CHAPTER  XI.   Effect  of  Taxes  upon  Supply,  Demand, 

and  International  Trade 290 

63-66.  Laws  of  division  of  taxes  between  producer  and  consumer. 
67,  68.  Effect  of  taxes  on  international  trade.  69.  Special  case 
of  monopolized  elements.  70,  71.  Effect  of  import  duties  on 
the  balance  of  trade.  Exercises. 

CHAPTER  XII.    Causes  which  determine  the  Rate  of  In- 
terest   302 

72.  The  usury  question.  73.  Equilibrium  of  supply  and  demand. 
74,  75.  Causes  of  the  rate  of  interest.  76.  The  minimum  rate. 
77.  Risk  as  affecting  the  rate  of  interest.  78.  Nature  of  capi- 
tal and  cause  of  interest.  Exercises. 


BOOK  IV. 

THE  SOCIETARY  CIRCULATION. 

CHAPTER  I.  The  Monetary  Flow 315 

1.  Exchanges  in  their  totality.  2.  The  dual  measure  of  an  economic 
quantity  as  a  fund  and  a  flow.  3.  Legal  persons.  4.  Flow  of 
the  currency.  5.  Relation  between  the  volume  and  the  flow. 
6.  Rapidity  of  circulation.  Illustration  of  the  wage-fund. 


CONTENTS.  xiii 

PAGE 

CHAPTER  II.  The  Equation  of  Societary  Circulation ....   326 

7.  The  industrial  circulation.  8.  Equation  of  socictary  circulation. 
9,  10.  Quantity  of  the  industrial  circulation.  11.  Exceptions 
to  the  equation.  12.  Illustrations  of  the  societary  circulation. 
Illustrations  and  exercises. 

CHAPTER  III.    Variations  in  the  Equation  of  Societary 
Circulation 338 

13.  Summary  of  results.  14.  Changes  in  the  volume  of  currency. 
15.  Changes  in  rapidity  of  circulation.  16.  Changes  in  the 
quantity  of  the  industrial  circulation  and  the  scale  of  prices. 
17.  Effects  of  changes  in  the  volume  of  the  currency.  18.  Ef- 
fect of  varying  indebtedness.  19.  Law  of  value  of  the  cur- 
rency. Exercises. 

CHAPTER  IY.    The  Measure  of  Demand  by  Absolute 

Value 348 

20.  Definition  and  measure  of  demand.  21-23.  The  two  measures 
of  demand.  24.  Popular  view  of  demand.  25.  Relation  of 
demand  to  prosperity. 

CHAPTER  V.  Individual  Income  and  Expenditure 359 

26,  27.  Measure  of  income.  28.  Expenditure  of  income.  29.  First 
law  of  income.  30.  Second  law  of  income. 

CHAPTER  VI.  Demand  as  the  Director  of  Industry 369 

31.  Summary  of  previous  conclusions.  32.  Subdivisions  of  the 
monetary  flow.  33.  Purchase  of  commodities  and  demand  for 
labor.  34.  Fundamental  law  of  employment.  35.  Case  of 
non-competing  groups.  36.  Other  forms  of  expenditure.  Ex- 
ercises. 

CHAPTER  YIL  Effect  of  a  Diminution  in  tJie  Flow  of 

the  Currency 380 

37.  Immediate  and  ultimate  effects  of  the  diminution.  38.  Con- 
tinual changes  unavoidable.  39,  40.  Exceptions  to  the  ten- 
dency. 


CONTENTS. 

MM 

CHAPTER  VIII.  Effect  of  Labor-saving  Processes 388 

41.  Effect  of  labor-snving  upon  the  denmud  for  labor.  43-44.  Ef 
feet  of  improvements  iu  production  upon  different  classes. 
45.  Another  view  of  the  subject. 

CHAPTER  IX.  The  Functions  of  the  Capitalist 396 

46-48.  Investments  do  not  change  the  demand  for  labor.  49.  The 
same  conclusion  from  the  communistic  stand-point.  50.  Sus- 
tenance and  capital.  51.  The  non-capitalist  cannot  consume 
a  greater  value  than  he  produces.  Exercises. 

CHAPTER  X.   The  Relation  of  Capital  to  Labor 408 

52.  Capital  as  the  means  of  employing  labor.  53.  Funded  capital 
of  a  factory.  54.  Capital  as  a  fund  and  a  flow.  55.  The  two 
measures  of  the  benefit  of  capital. 

CHAPTER  XL  Laws  of  a  Heterogeneous  Currency 413 

56.  How  one  currency  may  displace  another.  57.  Gresham's  law. 
58.  The  law  of  displacement.  Illustration. 

CHAPTER  XII.  Economic  Fallacies 419 

59,  60.  The  labor  fallacy.  61.  The  money  fallacy.  62,  63.  Illus- 
trations of  the  two  fallacies.  Illustration.  Exercises. 

Appendix  to  Book  IV 434 

Demand  for  commodities  versus  demand  for  labor. 


BOOK  V. 

APPLICATIONS  OF  ECONOMIC  SCIENCE. 

CHAPTER  I.  The  Let-alone  Principle 443 

1,  2.  Nature  and  significance  of  laissez-faire.  3.  The  principle  con- 
sidered as  a  fact.  4.  Grounds  of  laissez-faire  as  a  matter  of 
right  and  a  matter  of  policy.  5.  Criticism  and  defence  of  the 
policy.  6.  Limitations  on  the  preceding  criticisms.  7.  Limits 
of  application — The  keep-out  policy.  8.  Relative  applications 
of  the  two  principles.  9.  Example  of  a  difficulty.  Illustrations 
and  exercises. 


CONTENTS. 


CHAPTER  II.  The  Policy  of  a  Protective  Tariff 459 

10.  General  aspect  and  grounds  of  the  policy.     11.  Possible  benefits 
from  a  protective  tariff.     12.  The  argument  for  free  trade. 

13.  First  argument  for  protection :  the  home-industry  argument. 

14.  The  point  at  issue.     15.  Second  argument  for  protection: 
the  wages   argument.     16.    Example  from  a  glass  factory. 
17.  How  far  is  foreign  competition   possible?     18.  A  protec- 
tive policy  mutual  and  reciprocal.    Illustrations  and  exercises. 


CHAPTEK  III.  On  Taxation 479 

19.  General  considerations.  20.  General  features  of  all  taxation. 
21.  Comparison  of  taxation  with  loans.  22,23.  Effects  of  vari- 
ous modes  of  government  expenditure.  24.  Different  kinds  of 
taxes.  25.  Double  classification  of  taxes.  26.  Results  of  levy- 
ing a  tax.  27.  An  income-tax.  28.  The  taxation  of  wealth. 
29.  Hints  on  improving  our  system. 


CHAPTER  IY.  Monometallism  and  Bimetallism 494 

30.  The  two  systems.  31.  The  bimetallist  compared  with  the  mono- 
metallist  view.  32.'  Criticism  of  the  arguments.  33.  Peculiar- 
ity of  the  bullion  supply.  34.  Analysis  of  the  bimetallist 
argument. 


CHAPTER  Y.  Regulation  of  the  Currency 501 

35.  The  question  stated.  36.  Supposed  economy  of  bank  notes. 
37.  General  effects  of  a  bank  currency.  38.  Irredeemable 
paper  money.  39.  Current  views  of  the  subject.  40.  Condi- 
tions of  value  in  an  irredeemable  currency.  41.  Regulation  by 
banks.  42.  The  general  question  at  issue. 


CHAPTER  YI.  Of  Socialistic  Ideas 512 

43.  General  character  of  socialism.  44.  Current  errors.  45.  Equity 
of  our  present  system.  46.  Limitations  upon  its  equity. 
47,48.  Possibility  of  an  improvement  on  our  system.  49.  Com- 
munistic view.  50.  Fundamental  difficulties. 


CONTENTS. 


PAGE 


CHAPTER  VII.   Of  Charitable  Effort 526 

51.  General  considerations.  52.  Alms-giving  a  form  of  demand. 
58,  54.  Mendicity  a  result  of  charity.  55.  What  cau  be  done? 
56.  Capital  as  a  charitable  agent.  57.  Concluding  considera- 
tions. 


ADDENDUM.  539 

Summary  of  the  Leading  Principles  of  Economics  as  set 
forth  in  the  Present  Work. 


BOOK  I. 

.AND  METHOD 


OF 


ECONOMIC    SCIENCE. 


POLITICAL  ECONOMY. 


BOOK  L— LOGICAL  BASIS  AND  METHOD    OF 
ECONOMIC  SCIENCE. 


CHAPTER  I. 

INTRODUCTORY   VIEW   OF   THE    SUBJECT. 

1.  WHEN  we  enter  upon  the  study  of  a  new  subject  it  is 
sometimes  best  to  begin  by  divesting  our  minds  of  all  precon- 
ceived notions  respecting  it,  and  to  make  our  first  examination 
of  it  from  the  most  wide-reaching  point  of  view.  Let  us  then 
commence  our  study  of  Political  Economy  by  comparing  cer- 
tain processes  now  going  forward  on  the  surface  of  this  con- 
tinent with  the  corresponding  ones  of  four  centuries  ago. 

If  at  so  distant  an  epoch  we  had  been  able  to  survey  the 
whole  area  now  covered  by  the  United  States  we  should  have 
seen  no  form  of  human  activity  except  the  pursuits  of  savage 
life.  The  principal  occupation  of  the  inhabitants  would  have 
been  making  war  upon  each  other,  and  hunting  wild  animals 
for  food.  The  soil  and  the  forests  would  have  been  in  their 
natural  state,  and  neither  ocean  nor  river  would  have  borne 
any  vessel  larger  than  a  canoe. 

Let  us  next  suppose  such  a  survey  to  be  made  at  the  present 
time  by  a  being  gifted  with  intelligence  but  not  acquainted 
with  the  minds  of  men.  This  intelligent  being  would  now  see 
a  network  of  railways  covering  the  greater  part  of  the  country. 
Steamers  would  be  ploughing  the  rivers,  cities  would  be  build- 


4  BASIS  AND  METHOD  OF  ECONOMIC  SCIENCE.        [1. 1. 

ing,  immense  quantities  of  material  of  all  kinds  would  be  seen 
carried  from  place  to  place  by  locomotives,  trains  would  be 
running  in  every  direction,  stores  of  goods  would  be  piled  in 
warehouses,  and  the  prairies  would  be  covered  with  fields  of 
wheat  which  at  certain  seasons  would  be  found  undergoing  the 
process  of  reaping,  threshing,  and  transportation  to  the  sea- 
board. 

It  would  be  evident  that  this  new  activity  was  totally  differ- 
ent in  kind  from  anything  which  had  before  been  going  on. 
In  past  geological  ages  the  rocks  had  been  ploughed  by  glaciers, 
new  mountains  had  arisen,  rivers  had  changed  their  courses, 
new  lakes  had  formed  and  old  ones  had  sunk.  But  the  intelli- 
gent being  could  form  no  idea  wrhy  this  new  kind  of  activity 
had  arisen  until  he  became  aware  that  it  was  all  the  work  of 
other  intelligent  beings  called  men."  Having  learned  this,  let 
us  suppose  him  to  descend  to  the  earth  and  seek  out  some  one 
of  the  men  engaged  in  the  activity  in  order  to  learn  its  cause. 
He  first  finds  the  engineer  of  a  locomotive  making  its  way 
across  the  country.  "  Why  do  you  run  this  locomotive  ?"  he 
inquires.  The  answer  would  be,  "  I  run  it  in  order  to  earn 
money."  "  But  what  do  you  want  of  money?"  "  I  want  to 
buy  food,  clothing,  and  shelter  for  myself  and  my  family." 
Seeking  out  a  farmer  harvesting  wheat  on  the  prairie,  he  would 
get  nearly  the  same  answer.  Go  where  he  would,  every  one 
would  tell  him  that  he  was  working  for  himself,  and  that  the 
object  of  all  his  labor  was  to  secure  an  increase  or  a  better  sup- 
ply of  certain  articles  necessary  to  his  well-being,  the  most  im- 
portant of  which  would  serve  for  food,  clothing,  shelter,  pleas- 
ure, and  education.  Every  one  he  met  would  ostensibly  have 
only  his  own  interest  in  view. 

But  further  examination  would  show  that,  notwithstanding 
this  apparent  universal  selfishness,  all  were  engaged  in  working 
for  the  good  of  others.  Suppose  our  intelligent  being  to 
alight  on  the  plains  of  Texas  and  there  find  a  body  of  men 
herding  cattle.  He  sees  that  they  kill  the  cattle  and  give 
their  hides  to  other  men  to  be  carried  to  the  sea-coast.  Here 


1. 2.]  INTRODUCTORY  VIEW  OF  THE  SUBJECT.  g 

others  put  them  on  board  a  ship  on  which  they  are  conveyed 
to  England.  In  England  another  set  of  men  tan  the  hides, 

O  O 

and  yet  others  make  them  into  boots  and  shoes.  Wishing  to 
see  what  becomes  of  the  boots  and  shoes,  he  traces  them  to  the 
feet  of  a  miner  in  Cornwall.  The  miner  daily  goes  deep 
under  ground  to  take  out  tin.  Tracing  this  tin  to  its  destina- 
tion, he  finds  it  worked  by  countless  hands,  follows  it  across' 
the  Atlantic  to  New  York,  into  a  freight-car,  into  a  tinsmith's 
shop,  finally  seeing  it  end  its  long  journey  in  the  form  of 
utensils  for  the  use  of  the  herdsman  in  Texas. 

"How  did  you  know  that  that  Cornwall  miner  wanted  a  pair 
of  boots  ?"  he  says  to  the  herdsman.  "  How  did  you  know  that 
herdsman  in  Texas  wanted  a  tin  dipper?"  he  says  to  the  miner. 
To  his  astonishment  he  finds  each  in  entire  ignorance  of  what 
becomes  of  his  property  after  it  leaves  his  hand.  The  herds- 
man does  not  know  that  his  hides  were  even  taken  to  the  sea- 
shore ;  the  man  who  put  them  on  board  ship  did  not  even  know 
where  the  ship  was  going ;  and  not  a  man  on  the  ship  knew 
who  purchased  the  hides  in  England.  At  Cornwall  the  miner 
did  not  know  what  became  of  his  tin.  In  a  word,  nearly  every 
one  would  be  found  ignorant  of  the  final  destination  of  the 
things  he  was  making. 

2.  By  continuing  his  investigations  our  intelligent  being 
will  be  led  to  the  following  conclusions : 

1.  The  operations  which  he  has  been  studying  are  those  of  a 
single  harmonious  system. 

2.  The  object  of  this  system  is  to  supply  each  individual  man 
with  certain  objects  brought  to  him  from  all  parts  of  the  world 
and  necessary  to  his  existence,  health,  and  pleasure. 

3.  The  harmonious  working  of  the  system  leads  to  its  being 
thought  of  as  one  great  piece  of  mechanism. 

4.  But  this  mechanism  has  no  directing  head  to  move  it. 
Its  operations  are  kept  up  by  an  infinity  of  internal  forces, 
each  of  which  operates  only  within  a  very  limited  sphere. 

"We  shall  call  this  mechanism  the  social  organism. 


6  BASIS  AND  METHOD  OF  ECONOMIC  SCIENCE.       [1. 4. 

3.  Moving  Force  of  the  Social  Organism.     "We   are  now 
led  to  inquire  into  the  general  nature  of  the   force  which 
moves  the  organism.     The  matter  may  be  summed  up  in  the 
following  fundamental  proposition : 

The  one  force  which  keeps  every  part  of  the  social  organism 
in  activity  is  the  desire  of  each  individual  man  to  enjoy  cer- 
tain results  of  the  labor  of  others,  which  he  can  command  only 
by  himself  laboring  for  others. 

The  more  highly  developed  the  man  is,  the  greater  the 
number  and  variety  of  the  wants  which  he  requires  to  be  sup- 
plied by  the  social  organism.  In  the  lower  scale  even  of  civil- 
ized society,  it  suffices  if  he  can  gain  the  food  requisite  to 
maintain  his  strength,  and  such  clothing  and  shelter  as  will  pro- 
tect him  from  the  elements.  But  as  he  ascends  in  the  scale  he 
wants  more  palatable  food,  finer  clothes,  and  a  larger  house. 
After  enjoying  these,  his  house  must  be  embellished  with  every 
ornament  that  can  please  the  eye,  and  furnished  with  every 
appliance  that  can  give  bodily  ease.  If  he  can  command  yet 
more  from  the  social  organism,  the  whole  world  must  be 
searched  to  find  food  and  drink  for  his  table,  and  the  clothin^ 

7  O 

required  to  keep  his  body  at  the  most  agreeable  temperature. 
Finally,  after  commanding  everything  which  even  the  most 
cultivated  man  can  desire,  fie  will  accumulate  property  merely 
for  the  love  of  possessing  it,  for  the  power  which,  it  gives  him, 
and  for  the  good  to  his  fellow-man  which  he  may  be  able  to  do 
by  its  means, 

4.  The  Law  of  Labor.    Nature  does  not  directly  furnish 
man  with  the  objects  of  desire  now  under  consideration.     She 
supplies  only  the  raw  material  by  which  these  objects  may  be 
obtained  tli rough  the  instrumentality   of    human    exertion. 
Through  such  exertion,  bodilv  and  mental,  the   wool   of  the 

o  «/ 

sheep  becomes  clothing  for  man,  the  stone  in  the  quarry  be- 
comes the  foundation  for  his  house,  the  clay  in  the  fields 
becomes  the  material  for  its  walls,  the  wood  of  the  forest  is 
transformed  into  chairs  and  tables,  and  the  material  of  the  soil 


1. 6.]  INTRODUCTORY  VIEW  OF  THE  SUBJECT.  7 

becomes  food.  His  desires  being  unlimited,  while  his  means, 
that  is,  his  labor,  is  limited  to  a  few  hours  daily,  he  seeks  to 
economize  the  latter  so  as  to  secure  the  greatest  number  of 
objects  of  desire.  Hence  a  second  fundamental  proposition  : 

Mankind  continually  endeavors  to  satisfy  each  separate 
want  with  the  least  possible  expenditure  of  labor. 

On  this  simple  law  of  human  action  is  founded  the  science  of 
political  economy.  The  law  is  not  a  mere  hypothesis,  but  a 
truth  which  is  nearly  universal  so  far  as  civilized  men  are  con- 
cerned. Among  partially  civilized  communities,  whose  desires 
are  limited,  the  laws  of  political  economy  do  not  necessarily 
find  any  application. 

5.  Origin  of  the  Social  Feature  in  the  Want-supplying  Me- 
chanism.    If  each  man  had  to  depend  on  himself  for  all  his 
means  of  enjoyment,  he  would,  as  compared  with  his  actual 
condition,  be  as  good  as  helpless.     It  is  only  by  exchanging 
services  with  his  fellow-man  that  the  great  mass  of  objects  of 
desire  can  be  attained.    How  important  an  element  of  civiliza- 
tion this  is  any  one  will  see  by  looking  around  him  and  remark- 
ing how  few  even  of  the  necessaries  of  life  he  would  be  able 
to  command  if  they  were  not  supplied  him  by  his  fellow-man. 
How  many  of  us  could  make  our  own  bread  or  clothes,  or 
build  ourselves  the  rudest  kind  of  a  house  ? 

Indeed,  from  the  point  of  view  of  political  economy,  the 
great  difference  between  civilized  and  savage  communities  is 
that  in  the  latter  each  individual  for  the  most  part  works  for 
himself,  while  in  the  former  each  one  labors  for  all  the  others. 

6.  Let  us  see  how  far  we  may  carry  the  conception  of  so- 
ciety as  an  organism.     An  organism  is  something  which  is  not 
designed,  but  grows,  and  in  which  the  acting  forces  seem  to 
reside  in  all  the  molecules  which  make  up  the  organism.     For 
example,  in  the  human  body  every  corpuscle  of  the  blood  and 
every  nervous  fibre  is  endowed  with  certain  activities  which 
enable  it  to  perform  its  own  functions,  and  to  minister  to  the 


8  BASIS  AND  METHOD  OF  ECONOMIC  SCIENCE.       [1. 6. 

good  of  the  whole  body.  So  in  society.  The  molecules  are 
individual  men.  The  forces  which  bring  about  the  great 
movements  of  commerce  have  their  origin  in  individual  de- 
sires— just  as  the  nutrition  of  the  body  has  its  origin  in  the 
minute  molecules  of  blood.  As  the  will  of  a  man  does  not 
determine  how  his  blood  shall  circulate,  nor  how  nutrition 
shall  go  on,  so  there  is  no  one  authority  in  the  world  who  wills 
in  what  way  men  shall  employ  their  labor  or  render  services 
to  each  other.  Leaving  out  individual  cases,  this  is  wholly  a 
matter  of  private  agreement  between  man  and  man,  or  between 
one  body  of  men  and  another.  We  may  compare  the  igno- 
rance of  the  workman  as  to  who  shall  enjoy  the  products  of  his 
labor  with  the  lack  of  knowledge  on  the  part  of  each  corpuscle 
of  the  blood  as  to  the  effect  of  its  nutritive  power. 

Although  we  may  consider  society  as  an  organism,  we 
must  not  carry  the  analogy  with  living  organisms  too  far. 
There  is  one  very  important  point  in  which  society  or  the 
social  organism  differs  from  a  plant  or  animal.  "We  think  of 
every  plant  and  animal  as  having  an  individuality  of  its  own, 
distinct  from  the  conglomeration  of  organs  which  form  it. 
Moreover,  we  cannot  add  to  or  subtract  from  the  parts  of  the 
plant  or  animal  without  detracting  from  its  character.  A  man 
cannot  have  three  legs,  and  if  he  has  only  one  he  is  imperfect. 
But  there  is  no  such  completeness  in  the  social  organism.  We 
can  add  new  men  to  any  extent,  or  we  may  divide  a  country 
into  two  without  changing  the  character  of  the  organism.  In 
other  words,  it  has  no  such  attribute  as  individuality.  By 
assigning  such  an  attribute  to  it,  and  giving  it  a  name,  we  may 
be  led  into  confusion  of  thought.  The  people  of  each  country 
and  of  each  city  may  be  considered  to  form  a  separate  organism, 
but  at  the  same  time  steam  transportation  has  brought  most  of 
the  world  into  such  close  communication  that  we  may  consider 
all  these  little  organisms  as  parts  of  a  great  one,  including  the 
whole  human  race. 

The  more  closely  and  intelligently  we  look  into  the  opera- 
tions of  human  society  the  more  we  shall  marvel  at  the  perfec- 


L6.]  INTRODUCTORY  VIEW  OF  THE  SUBJECT.  9 

tion  of  its  working.  I^o  man  could  ever  have  contrived  such 
a  system ;  and  had  it  been  contrived,  no  men  or  combination  of 
men  could  direct  its  work,  any  more  than  they  could  send  the 
blood  through  the  body  of  an  animal.  To  the  thinking  man 
it  forms  one  of  the  most  interesting  objects  of  study.  There 
is  nothing  in  the  wonders  of  the  heavens  or  the  mysteries  of 
chemical  combination  better  fitted  to  kindle  our  curiosity,  and 
to  gratify  our  desire  to  understand  what  is  going  on  around  us, 
than  the  study  of  the  social  organism. 

We  shall  proceed  in  this  study  on  a  plan  not  unlike  that 
which  the  physician  follows  in  acquiring  a  knowledge  of  the 
human  body.  But  as  a  preliminary  step  we  shall  have  to  enter 
upon  some  considerations  of  scientific  method  not  necessary 
to  the  work  of  the  physician.  The  reason  of  this  is  that  our 
object  of  study  is  farther  removed  from  the  immediate  sphere 
of  sense  than  is  that  of  the  medical  student.  The  latter  studies 
the  bodies  of  animals  by  actual  dissection  and  by  observation 
with  his  eye  and  with  the  microscope.  But  the  economist  can- 
not dissect  society  and  make  its  component  parts  visible  in  the 
same  way.  The  dissection  is  indeed  to  be  performed,  but  only 
in  imagination,  by  describing  the  different  parts  of  which 
society  is  made  up,  and  bringing  in,  not  the  real  men  who  sur- 
round us,  but  abstract  and  generalized  forms  of  these  men, 
which  bear  the  same  relation  to  living  men  that  a  mental  im- 

o 

age  does  to  a  real  object.  To  compensate  for  this  substitu- 
tion of  mental  sight  for  eyesight,  we  need  scientific  method. 
The  order  of  our  studies  will  not  be  materially  different  from 
that  of  the  medical  student.  Our  first  consideration  is  the 
anatomy  of  the  organism,  the  forces  which  move  it,  and  the 
manner  in  which  the  various  parts  are  combined  into  a  single 
harmonious  whole.  Having  got  a  clear  idea  of  what  the  or- 
ganism is,  we  have  then  to  go  into  many  details  respecting  the 
laws  according  to  which  it  operates.  Finally,  we  shall  have  to 
apply  our  knowledge  of  these  laws  so  as  to  form  intelligent 
conclusions  respecting  the  effect  of  governmental  action  upon 
the  interests  of  society  at  large. 


10          BASIS  AND  METHOD  OF  ECONOMIC  SCIENCE.       [I.  7. 


CHAPTER  II. 

DEFINITION   OF   THE    FIELD   OF   POLITICAL    ECONOMY. 

7.  FROM  what  was  said  in  the  last  chapter  it  will  be  seen 
that  Political  Economy  treats  of  human  desires,  and  the  laws 
and  conditions  of  their  gratification  under  the  circumstances 
in  which  men  actually  find  themselves.  But  the  field  of 
human  desires  is  by  no  means  all  included  in  Political  Econo- 
my. Confusion  of  ideas  often  arises  from  not  considering  the 
limits  of  the  subject.  We  therefore  point  out  certain  branches 
of  thought  which,  though  sometimes  confounded  with  Political 
Economy,  do  not  belong  to  it. 

There  is  a  wide  field  of  investigation  included  under  the 
general  term  Sociology,  or  the  science  of  society.  The  consid- 
eration of  human  desires  in  some  of  their  aspects  belongs  to 
this  field.  Although  the  subjects  treated  of  under  the  general 
head  of  Sociology  all  run  into  each  other  by  insensible  grada- 
tions, yet  in  that  principal  branch  of  the  subject  growing  out 
of  human  desires  we  may  recognize  at  least  three  divisions. 

Firstly,  we  may  inquire  how  human  desires  originate,  and 
how  they  are  modified  by  the  circumstances  which  surround 
the  individual.  Among  these  circumstances  are  his  ancestry, 
his  education,  the  community  which  surrounds  him,  and  the 
government  and  institutions  under  which  lie  lives.  But  this 
inquiry  into  the  origin  and  growth  of  human  desires  is  quite 
distinct  from  Political  Economy.  The  latter  takes  the  man  up, 
ready-made  as  it  were,  and  has  nothing  to  do  with  the  question 
how  he  got  to  be  what  he  is.  The  reason  for  this  distinction 
may  be  seen  at  once  by  reflecting  that  the  laws  which  control 
the  formation  of  character  are  distinct  from  those  which  de- 
termine the  acts  of  men  after  their  characters  are  formed,  and 
therefore  must  not  be  confounded  with  them. 


I.  8.]  DEFINITION  OF  THE  FIELD.  H 

Secondly,  we  may  analyze  the  desires  and  appetites  of  men, 
investigate  their  various  good  and  evil  tendencies,  set  forth 
their  uses  and  abuses,  and  trace  their  ultimate  effects  upon  the 
welfare  of  the  individual  and  of  society.  This,  however,  is  not 
the  object  of  Political  Economy,  but  of  Moral  Science. 

Thirdly,  taking  the  desires  and  appetites  just  as  they  are,  and 
regarding  them  merely  as  forces  which  impel  men  to  action,  we 
may  investigate  the  laws  of  human  activity  to  which  they  give 
rise.  In  other  •  words,  having  given  a  community  of  men 
moved  by  certain  desires,  we  trace  out  the  laws  which  govern 
their  efforts  in  seeking  to  gratify  those  desires.  This  and  this 
alone  is  the  object  of  Political  Economy  as  a  pure  science. 

8.  Illustrations.  As  an  illustration  of  the  difference  be- 
tween the  fields  of  inquiry  just  described,  let  us  consider  the 
case  of  a  laborer  who  works  industriously  all  day  and  then 
spends  his  earnings  in  strong  drink. 

The  sociologist,  who  is  concerned  with  the  laws  of  develop- 
ment, searches  out  the  history  of  the  man  and  his  parents,  and 
shows  how,  by  the  hereditary  transmission  of  appetite,  by 
early  indulgence  of  his  morbid  taste,  by  the  influence  of  evil 
companions,  and  by  a  lack  of  proper  mental  stimulus  combined 
with  exhausting  bodily  labor,  his  present  deplorable  character 
has  been  formed.  The  results  which  may  be  gained  by  this 
investigation  will  be  of  the  greatest  importance  to  one  seeking 
the  amelioration  of  humanity,  but  they  will  not  belong  to 
Political  Economy.  The  political  economist  looks  at  the  pile  of 
earth  thrown  up  by  the  man's  shovel,  shows  that  love  of  strong 
drink  was  one  of  the  moving  forces  that  inspired  him,  and 
reckons  how  much  less  work  would  have  been  done  if  he  had 
not  expected  the  tavern  to  be  open  that  night. 

The  moralist  shows  the  man  the  destructive  effect  of  his 
conduct  upon  his  highest  interests,  and  the  suffering  to  which 
he  exposes  his  famil}r,  and  thus  hopes  to  dissuade  him  from 
further  indulgence. 

Finding  his  preaching  vain,  the  moralist  goes  to  the  sociol- 


12          BASIS  AND  METHOD  OF  ECONOMIC  SCIENCE.       [I.  8. 

ogist  for  instruction.  Here  he  learns  that  warnings  are  of  no 
avail  to  one  whose  appetites  are  his  master.  The  ever-pres- 
ent thirst  overcomes  all  dread  of  the  future.  The  man  must, 
either  by  medical  treatment  or  by  physical  restraint,  be  kept 
from  gratifying  the  morbid  appetite.  The  moralist  desiring  to 
employ  only  effective  means,  now  appeals  to  the  political  econo- 
mist to  know  what  effect  various  plans  for  foiling  the  aims  of 
the  drunkard  will  have.  Perhaps  he  thinks  that  if  he  can  in- 
duce the  man's  employer  not  to  pay  him  in  money  but  in 
bread-tickets,  he  will  be  no  longer  able  to  gratify  his  appe- 
tite. But  the  economist  will  point  out  that  this  plan  will 
be  ineffective,  because  the  man  can  exchange  his  tickets  for 
money,  and  thus  obtain  the  means  of  buying  liquor.  Again, 
the  moralist  will  inquire  whether  by  levying  a  heavy  tax  on 
spirituous  liquor  and  thus  advancing  its  price  the  man  will  not 
be  discouraged  from  indulging  it.  To  answer  this  question  the 
economist  collects  statistics  showing  to  what  extent  men  are 
prevented  from  indulging  their  appetites  by  increasing  the 
cost  of  the  indulgence.  As  the  result  of  an  immense  collection 
of  facts  he  will  show  the  moralist  that  nothing  can  be  expected 
from  this  remedy.  Perhaps  his  conclusion  would  be  that  the 
higher  the  price  of  liquor  the  more  the  man  would  spend  upon 
it,  and  therefore  the  less  money  he  would  have  for  his  family. 
The  economist  might  say  in  conclusion,  that  within  the 
range  of  his  science  no  remedy  could  be  found.  His  reason- 
ing might  be :  "  It  is  very  clear  from  the  man's  actions  that 
he  desires  strong  drink  more  than  he  desires  bread  or  clothinsr 

CP  o 

for  his  family.  I  know  of  no  way  in  which  a  man  can  be  made 
to  accept  that  which  he  desires  less  in  preference  to  that  which 
he  desires  more,  except  positive  restraint." 

In  all  this  the  political  economist  would  not  be  expressing 
any  opinion  upon  the  good  or  evil  of  the  drunkard's  desires. 
It  is  his  sole  business  to  trace  cause  to  effect,  and  in  doing  so 
to  accept  things  as  they  exist.  But  it  must  not  be  supposed 
that  his  conclusions  are  therefore  of  no  value  to  the  moralist. 
On  the  contrary,  what  the  moralist  most  needs  is  to  know 


1.  9.]  DEFINITION  OF  THE  FIELD.  13 

the  ultimate  effect  of  the  different  remedial  measures  which 
may  be  proposed.  It  does  not  follow  that  because  a  benevo- 
lent man  or  a  charitable  association  desires  to  do  good  its  ex- 
ertions will  really  result  in  benefiting  the  community.  For 
instance,  it  is  now  very  generally  recognized  by  thinking  men 
that  indiscriminate  charity  is  a  source  of  evil,  in  that  it  en- 
courages mendicancy  and  general  helplessness.  Whether  all 
charity  as  actually  practised  does  not  in  this  way  do  as  much 
harm  as  good  is  still  an  open  question,  and  one  which  can  be 
decided  only  by  the  investigations  of  the  political  economist. 
Economical  science,  therefore,  considers  man  simply  as  an 
adapter  of  means  to  ends,  but  does  not  inquire  how  these  ends 
arise,  nor  whether  they  are  really  the  ends  towards  which  men 
should  strive.  If  this  limitation  seems  unsatisfying  to  the 
reader,  he  must  remember  that  the  mixing  up  of  different 
branches  of  inquiry  is  productive  of  confusion  of  thought, 
and  that  the  questions  whether  an  end  is  good  and  how  an 
end  can  best  be  attained  are  totally  different. 

9.  It  is  neither  necessary  nor  important,  even  were  it  pos- 
sible, that  we  should  define  with  entire  precision  the  point  at 
which  political  economy  stops  in  carrying  out  the  line  of  in- 
vestigation we  have  indicated.  A  sufficient  idea  of  its  field 
may  be  given  by  saying  that  it  includes  the  general  subject  of 
the  laws  of  human  welfare  so  long  as  we  consider  welfare  to 
be  only  the  gratification  of  desires. 

"Wealth  being  directly  or  indirectly  a  potent  instrument  for 
commanding  objects  of  desire,  political  economy  is  sometimes 
called  the  Science  of  Wealth. 

Again,  objects  of  wealth  being  nearly  all  obtained  by  pur- 
chase and  sale  in  public  markets,  the  science  has  also  been  called 
the  Science  of  Exchanges. 

"Economics"  is  a  term  introduced  by  recent  English  writers 
which  has  the  double  advantage  of  brevity  and  of  avoiding 
the  serious  objections  brought  against  the  current  term  Politi- 
cal Economy. 


14         BASIS  AND  METHOD  OF  ECONOMIC  SCIENCE.     [1. 10. 


CHAPTER  III. 

OF   SCIENTIFIC   METHOD. 

1C.  As  a  general  rule  the  opinions  of  men  on  those  sub- 
jects which  immediately  concern  their  interests  as  individuals, 
and  in  which  the  truth  of  the  conclusions  can  be  speedily 
tested  by  experience,  are  sound  and  correct.  But  when  men 
step  outside  this  limited  field  by  entering  upon  the  investigar 
tion  of  wider-reaching  subjects  and  more  remote  interests, 
error  is  the  rule  rather  than  truth.  The  reason  of  this  prone- 
ness  to  error  is  that  in  all  such  cases  there  is  but  one  way  of 
being  right,  while  the  ways  of  being  wrong  are  innumerable. 
A  course  of  reasoning  may  change  from  right  to  wrong  at 
any  step,  and  thus  the  chances  of  being  right  at  the  end  are 
very  small  unless  thought  is  aided  by  correct  guiding  prin- 
ciples. Such  principles  are  afforded  by  scientific  method. 

In  treating  this  subject  we  must  begin  by  correcting  a  seri- 
ous misapprehension.  This  misapprehension  consists  in  think- 
ing of  scientific  method  as  something  wholly  different  from  the 
method  of  drawing  conclusions  in  every-day  life.  Although 
the  following  may  not  be  considered  a  logically  exact  defi- 
nition of  the  subject,  it  is  a  description  which  the  student 
should  carefully  bear  in  mind. 

Scientific  method  consists  in  applying  to  those  subjects 
which  lie  without  the  range  of  our  immediate  experience  those 
same  common-sense  methods  of  reasoning  which  successful 
men  of  the  world  apply  in  judging  of  matters  which  concern 
their  own  interests. 

It  is  not  therefore  some  difficult  and  intricate  theory  to  be 
learned,  but  rather  the  practice  of  a  restraining  discipline  to 
keep  the  mind  from  wandering  into  vague  speculation,  and 
confine  it  to  the  analysis  of  each  special  case  in  hand.  A 


1. 11.]  OF  SCIENTIFIC  METHOD.  15 

distinguished  English  writer  condensed  the  above  description 
by  defining  science  as  simply  "  organized  common-sense." 

11.  The  Problem,  of  Scientific  Method.  Let  us  now 
look  at  the  problem  which  faces  us  with  a  view  of  seeing 
how  we  are  to  apply  common-sense  methods  to  its  solution. 
The  situation  is  this :  every  man  who  reads  the  newspapers 
transacts  business,  and  studies  history  is  brought  from  day  to 
day  into  contact  with  a  great  mass  of  facts.  He  sees  going  on 
before  him  the  great  operations  of  manufacture  and  commerce 
which  we  have  summarily  described  in  the  opening  chapter. 
The  longer  he  lives  the  greater  the  number  of  events  he  will 
have  in  his  mind.  But  the  mere  knowledge  that  such  and 
such  things  have  happened,  that  certain  cities  have  been  built, 
new  states  populated,  new  markets  opened  up,  fluctuations  in 
prices  taken  place,  and  particular  changes  in  the  tariff  been 
made,  is  in  itself  of  no  use  to  him.  The  poorest  day-laborer 
may  know  almost  as  much  about  what  has  been  going  on  as 
he  does  himself.  What  the  man  wants  to  be  able  to  do  is  to 
see  into  the  future.  If  it  is  proposed  to  build  a  new  railway, 
lie  wants  to  know  what  effect  this  railway  will  have  upon  the 
supply  of  goods  brought  to  market.  If  a  new  silver-mine  is 
discovered,  he  wants  to  know  the  effect  upon  the  supply  of 
silver  and  upon  the  coinage  of  money.  If  Congress  changes 
the  tariff,  he  wants  to  know  the  effect  of  this  change  upon  the 
wages  or  profits  he  can  earn,  and  upon  the  prices  of  the 
clothes  he  wears,  of  the  food  lie  eats,  and  of  the  goods  he 
.buys  and  sells.  Thus  the  problem  before  him  is,  by  means 
of  such  knowledge  as  he  has  acquired  from  reading  and  ex- 
perience, to  foresee  in  what  way  his  interests  or  the  interests 
of  the  country  at  large  are  going  to  be  affected  by  changes 
and  improvements  in  manufactures,  commerce,  and  govern- 
mental policy. 

Here  it  is  that  scientific  method  must  come  into  play.  It 
shows  him  how  he  actually  does  go  to  work  to  form  conclu- 
sions about  the  familiar  facts  of  his  daily  life,  and  then  it 


16          BASIS  AND  METHOD   OF  ECONOMIC  SCIENCE.     [1. 12. 

shows  him  how  to  apply  the  same  method  to  the  larger  problem 
before  him. 

12.  Foi'm  of  General  Propositions.  In  the  application 
of  scientific  method  all  our  conclusions  must  ultimately  rest 
upon  facts.  But,  as  just  shown,  we  cannot  draw  any  sound 
conclusion  from  facts  unless  the  circumstances  are  properly 
analyzed.  If  we  have  a  fact  or  a  series  of  facts  we  must  in- 
quire, How  did  they  arise?  According  to  what  general  rule 
did  these  things  happen  ?  These  questions  are  answered, 
sometimes  in  a  very  imperfect  way,  and  at  other  times  more 
satisfactorily,  by  establishing  certain  relations  between  events ; 
which  relations  are  known  by  the  name  of  laws  of  nature,  or 
simply  laws. 

A  law  of  nature  can  only  be  expressed  in  the  form  of  a 
conditional  proposition.  Its  general  form  is : 

If  a  certain  state  of  things  be  true, 
Then  a  certain  result  will  follow. 

Examples  of  such  propositions  are  as  follows : 

If  you  touch  gunpowder  with  fire,  then  it  will  explode. 

If  you  leave  a  heavy  body  unsupported,  then  it  will  fall  to 
the  ground. 

If  you  bring  a  large  extra  supply  of  goods  to  market,  then 
the  prices  will  fall. 

If  you  lessen  a  man's  income,  then  he  will  economize  in  his 
expenditures. 

If  you  increase  the  import  duty  on  goods  from  abroad, 
then  their  prices  will  rise. 

If  you  give  a  man  perfect  freedom,  then  he  will  follow  the 
course  indicated  by  his  feelings  and  his  judgment. 

In  these  general  statements,  that  which  is  supposed  true  and 
taken  as  the  basis  of  the  argument  is  called  the  hypothesis ; 
that  which  then  follows  is  called  the  conclusion. 

Now  notice  certain  characteristics  of  all  these  propositions. 
In  the  first  place,  the  conclusion  is  only  hypothetically  true. 
The  hypothesis,  commencing  with  an  "if,"  is  presupposed, 


1. 13.]  OF  SCIENTIFIC  METHOD.  17 

and  if  it  is  not  true  the  conclusion  may  fail.  For  example : 
if  there  is  no  heavy  body,  or,  the  body  existing,  if  we  keep 
it  supported,  there  is  no  falling.  Gunpowder  has  never  ex- 
ploded within  a  hundred  miles  of  the  north  pole.  And  in 
general  all  scientific  conclusions  are  to  be  regarded,  not  as 
particular  truths,  but  only  as  things  which  are  or  would  be  true 
under  certain  assumed  conditions.  The  question  whether 
these  conditions  do  or  do  not  exist  is  a  matter  of  fact  always 
open  to  challenge,  and  which  we  always  have  to  decide  in  the 
best  way  we  can.  All  that  we  can  ask  of  the  scientific  state- 
ment is  that  the  connection  between  the  hypothesis  and  the 
conclusion  shall  be  true. 

Again,  we  must  never  forget  that,  in  addition  to  the  hypothe- 
sis which  we  state,  we  always  have  to  presume  the  negative 
hypothesis  that  nothing  happens  to  change  the  conclusion.  For 
example,  when  we  say  if  gunpowder  is  touched  with  fire  it 
will  explode,  then,  in  addition  to  the  expressed  hypotheses  that 
the  gunpowder  exists  and  that  you  touch  it  with  fire,  we  have 
the  implied  hypothesis  that  it  is  dry  and  in  good  order  as  we 
are  accustomed  to  find  it.  When  we  say  that  an  unsupported 
heavy  body  falls  to  the  ground,  we  must  implicitly  assume  that 
it  is  heavier  than  its  own  bulk  of  air,  because  if  lighter  than 
air,  like  a  balloon,  it  will  rise  instead  of  falling.  We  also 
assume  that  it  is  not  held  up  by  electrical  or  any  other  attrac- 
tion. If  it  is  fired  up  from  a  cannon  it  will  not  fall  to  the 
ground  immediately,  though  it  must  ultimately.  Time  will 
be  required  for  the  effect  to  follow.  Thus,  every  general 
proposition  may  need  to  be  modified  in  an  infinity  of  ways 
when  we  consider  it  in  its  application  to  special  cases. 

13.  Induction  and  Deduction.  General  propositions  can 
only  be  learned  in  the  first  place  by  a  study  of  the  facts  of 
experience.  The  process  by  which  we  infer  a  general  law 
from  observed  facts  is  logical  induction.  Induction  is  therefore 
the  first  step  in  the  acquisition  of  exact  knowledge. 

Deduction.  The  process  of  reaching  a  conclusion  by  means 
2 


18          BASIS  AND  METHOD  OF  ECONOMIC  SCIENCE.     [1. 14. 

of  general  propositions  is  called  logical  deduction.  In  strict- 
ness the  process  of  deduction  consists  in  chaining  together  a 
series  of  hypothetical  propositions,  the  conclusion  of  each  step 
being  in  whole  or  part  the  hypothesis  of  the  step  next  follow- 
ing. As  a  simple  example  of  how  a  deductive  process  may  be 
applied  without  thinking  of  logic,  let  us  take  our  conclusion 
as  to  what  will  become  of  a  piece  of  meat  which  a  child  drops 
over  the  surface  of  a  pond  stocked  with  fish.  To  reach  the 
conclusion  we  have  unconsciously  in  mind  the  separate  propo- 
sitions, "  An  unsupported  body  held  over  water  will  drop  to 
the  surface  of  the  water ;"  "  A  body  heavier  than  water  will 
sink ;"  "  If  edible  matter  comes  within  reach  of  a  fish  he  will 
eat  it."  By  joining  these  several  propositions  we  have  the 
single  proposition,  "  Heavy  edible  matter  left  unsupported  over 
a  pond  stocked  with  fish  will  be  eaten  by  the  fish."  But  we 
must  never  forget  to  preserve  a  distinction  between  this  gen- 
eral and  hypothetical  proposition  and  the  concrete  particular 
propositions,  "  This  pond  is  stocked  with  fish ;"  "  Mary  let  a 
piece  of  meat  drop  into  the  pond."  We  can  reach  a  conclu- 
sion as  to  the  actual  matter  of  fact  only  by  assuring  ourselves 
of  two  things :  first,  that  the  existing  state  of  things  corre- 
sponds to  the  hypothesis ;  and  secondly,  that  there  is  a  true 
general  connection  between  the  hypothesis  and  conclusion. 

14.  Succession  of  Cause  and  Effect.  In  the  process  of 
deduction  we  suppose  that  there  is  a  state  of  things  corre- 
sponding to  one  or  more  of  our  hypotheses.  From  this  suppo- 
sition we  conclude,  by  the  aid  of  the  law,  that  another  state  of 
things,  or  conclusion,  will  follow.  In  this  process, 

The  first  state  of  things  is  called  the  cause  : 

o  / 

The  second  state  of  things  is  called  the  effect. 

And,  as  already  indicated,  that  general  statement  which  ex- 
presses the  relation  between  the  cause  and  the  effect  is  called 
the  law. 

The  distinction  of  cause  and  effect  is  only  relative,  not  ab- 
solute; an  event  is  an  effect  in  its  relation  to  the  preceding 


I.  15.]  OF  SCIENTIFIC  METHOD.  19 

events  out  of  which  it  arose ;  but  it  is  also  a  cause  of  the  events 
which  follow  it  in  pursuance  of  a  law.  As  a  general  rule, 
everything  that  happens  is  both  a  cause  and  an  effect. 

It  must  be  remembered  that  the  relation  of  cause  and  effect 
is  not  one  of  mere  succession,  but  of  succession  in  pursuance 
of  a  general  law.  When  a  countryman  at  an  inn  pulled  a  bell, 
and  immediately  heard  the  gong  sound  for  dinner,  he  inferred 
a  relation  of  cause  and  effect  between  his  effort  and  the  sound 
which  followed.  He  was  clearly  correct  in  his  facts.  What 
was  his  error  ?  It  consisted  in  inferring  a  general  law  of  con- 
nection between  the  pull  and  the  sound,  when  in  reality  there 
was  no  such  law. 

15.  Abstraction.  All  science  presupposes  that  the  events 
with  which  it  is  concerned  are  parts  of  a  regular  series  of 
causes  and  effects,  following  each  other  in  pursuance  of  general 
laws.  Most  events  which  actually  occur  in  the  world  are  the 
product  of  a  very  complex  combination  of  causes,  in  which 
the  silent  hypothesis,  "other  conditions  being  equal,"  does 
not  hold  true,  and  in  which  the  operation  of  every  cause  is 
altered  by  the  concurrent  action  of  a  multitude  of  other 
causes.  These  causes  are  continually  changing,  so  that  it  is 
generally  impossible  to  infer  a  law  from  mere  observation.  To 
reach  a  rational  result,  we  have  to  begin  by  considering  the  ac- 
tion of  each  cause  separately.  We  are  then  said  to  make  ab- 
straction of  all  the  causes  which  we  do  not  consider. 

The  first  steps  in  the  construction  of  a  deductive  science 
consist  in  the  abstraction  of  all  but  the  most  fundamental 
and  widely  diffused  causes,  and  in  investigating  the  succession 
of  cause  and  effect  as  it  would  be  if  the  action  of  these  causes 
were  not  modified  in  any  way.  As  an  example  of  this  let  us 
take  the  science  of  mechanics. 

The  motion  of  every  body  on  the  surface  of  the  earth  is  the 
result  of  a  great  number  of  forces.  We  get  at  the  effect  of 
these  forces  by  such  a  succession  of  steps  as  the  following : 

First  Hypothesis.     We  suppose  a  body  acted  on  by  no  force. 


20         BASIS  AND  METUOD  OF  ECONOMIC  SCIENCE.     [1. 15. 

The  conclusion  is,  the  body  will  move  forward  in  a  straight 
line  forever. 

Second  Hypothesis.  "We  suppose  the  body  to  fall  under  the 
influence  of  gravity,  which  we  suppose  constant. 

Conclusion.  The  body  will  fall  a  certain  distance  the  first 
second,  three  times  as  far  the  next  second,  five  times  as  far  the 
third,  and  so  on. 

Let  it  be  remembered  that  neither  of  these  hypotheses  is 
ever  fulfilled  in  nature.  "We  never  saw  a  body  either  acted 
on  by  no  force,  or  moving  under  the  influence  of  no  force  but 
gravity.  Gravity  itself  is  not  the  same  at  different  heights. 
The  same  thing  is  true  of  all  the  fundamental  conceptions  of 
physics.  We  talk  and  think  of  bodies  having  no  size ;  of 
"material  points;"  of  machines  without  friction,  and  so  forth. 
We  do  all  this  to  lay  a  foundation  for  further  studies  in  which 
the  causes  first  abstracted  may  be  considered. 

So  in  Political  Economy.  "We  begin  with  a  hypothetical 
man,  animated  by  the  one  motive  of  gaining  all  the  satisfaction 
he  can  by  his  labor,  alive  to  his  own  interests,  ready  to  turn 
his  hand  to  a  variety  of  things,  and  of  such  sound  judgment 
that  he  makes  no  mistakes  in  his  calculations.  In  other  words, 
we  at  first  make  abstraction  of  all  the  little  imperfections  and 
variations  from  this  ideal.  We  then  make  further  hypotheses 
respecting  the  occupations  he  can  engage  in,  and  the  appli- 
ances he  can  command,  taking  care  to  come  as  near  as  possible 
to  the  general  average  condition  of  mankind.  Then  we  con- 
sider one  by  one  the  several  variations  from  our  first  hypothe- 
ses, until  we  have  gone  as  far  as  we  deem  necessary. 

Such  hypotheses  and  the  laws  with  which  we  connect  them 
tell  us  nothing  about  quantities,  and  therefore  do  not  suffice 
to  reach  practical  conclusions.  To  answer  the  question,  How 
much  ?  we  have  to  study  statistics  of  all  kinds,  and  thus  learn, 
with  as  much  exactness  as  we  may,  the  numerical  quantities  of 
all  kinds,  whether  the  numbers  of  various  kinds  of  men,  or  the 
quantities  of  various  productions,  which  enter  into  the  prob- 
lems of  our  science. 


1. 16.]  OF  SCIENTIFIC  METHOD.  21 

16.  Pure  and  Applied  Science.  The  preceding  method 
leads  to  a  distinction  between  pure  and  applied  science. 

A  pure  science  is  one  in  which  we  consider  only  those 
causes  whose  action  we  can  trace  with  clearness  and  certainty, 
and  make  abstraction  of  all  others. 

An  applied  science  is  one  in  which  we  consider,  in  the  best 
way  we  can,  all  the  causes  which  come  into  play  in  some  special 
class  of  cases,  and  thus  reach  conclusions  which  we  believe  to 
need  no  further  modification. 

Thus,  there  is  a  pure  science  of  therrao-dynamics,  formed 
on  ideal  kinds  of  matter,  having  properties  never  found  in  real 
matter.  And  there  is  an  applied  science  of  steam-engineering 
in  which  the  special  properties  of  the  iron  in  the  engine,  the 
coal  it  consumes,  and  the  steam  it  generates  are  considered. 

So  with  Political  Economy.  Pure  economics  is  an  ideal  or 
hypothetical  science  in  which  we  consider  only  the  general 
characters  of  great  classes  of  men,  and  those  widely  diffused 
causes  whose  action  we  can  trace  in  the  social  condition  of  com- 
munities and  in  the  great  movements  of  agriculture,  manufac- 
tures, and  commerce.  We  thus  form  a  single  consistent  system. 

In  applied  political  economy  we  superpose  upon  the  system 
of  pure  economics  the  causes  which  operate  in  some  special 
case,  and  find  how  the  conclusions  of  pure  economics  are  thus 
modified.  We  may  consider,  for  example,  some  peculiar  state 
of  things  in  a  German  town,  or  the  economic  effect  of  estab- 
lishing homes  for  newsboys  in  New  York,  or  the  effect  of  a 
strike  in  the  building  trade  upon  the  interests  of  those  engaged 
in  it. 

The  distinction  between  a  pure  and  an  applied  science  can- 
not be  made  a  sharp  one.  As  our  knowledge  expands,  pure 
science  is  made  to  include  a  wider  and  wider  field,  and  we  can 
never  say  exactly  where  the  line  should  bo  drawn. 


22         BASIS  AND  METHOD  OF  ECONOMIC  SCIENCE.     [1. 17. 


CHAPTER  IY. 

SPECIAL   FEATURES   OF   ECONOMIC   METHOD. 

17.  ALTHOUGH  the  processes  just  described  are  common  to 
all  science,  yet  in  the  case  of  political  economy  they  have  to 
be  applied  in  a  way  entirely  different  from  that  of  physical 
science.  The  reason  of  this  difference  is  that  one  great  object 
of  political  economy  is  to  foresee  how  men  will  act.  Now, 
human  acts  are  not  governed  by  necessary  and  invariable  laws 
of  the  class  recognized  in  physics,  but  by  will  and  choice. 
There  is  no  law  of  nature  which  compels  goods  to  be  sent  to 
the  best  market,  or  which  requires  men  to  dig  mines  and  build 
steamships.  Should  we  attempt  to  reduce  the  phenomena  of 
manufactures,  commerce,  mining,  etc.,  to  the  same  kind  of  laws 
which  prevail  in  inanimate  nature,  we  should  never  get  at  any 
certain  result,  but  might  be  wrong  as  often  as  right.  Hence 
an  investigator  ignoring  human  will  and  motives  and  studying 
the  work  of  mankind  as  if  it  were  a  product  of  natural  forces 
would  be  at  a  great  disadvantage.  . 

But  we  have  a  resource  which  compensates  this  disadvantage 
in  our  knowledge  of  the  operations  of  our  own  minds.  We 
each  know  individually  that  in  deciding  how  we  shall  employ 
our  time  we  are  governed  by  a  consideration  of  the  relative 
benefits  arid  evils  of  the  various  courses  of  action  between  which 
we  have  to  choose.  As  a  rule  we  choose  that  course  which 
will  yield  us  most  good  or  pleasure.  Looking  at  our  fellow- 
men,  we  are  irresistibly  led  to  the  belief  that  their  acts  proceed 
from  like  motives.  "We  instinctively  trace  their  actions  to 
hopes,  fears,  and  desires  similar  to  those  which  animate  our- 
selves. We  feel  that,  like  ourselves,  they  seek  to  reap  the 
maximum  of  enjoyment  from  the  minimum  of  disagreeable 
labor. 


1. 18.]     SPECIAL  FEATURES  OF  ECONOMIC  METHOD.  23 

This  conclusion  is  verified  by  universal  experience.  We 
never  see  men  voluntarily  wasting  their  labor  unless  the  labor 
itself  is  a  source  of  enjoyment.  In  no  case  do  they  spend  more 
money  or  time  on  an  object  than  is  necessary  for  the  purpose. 

The  significance  of  our  knowledge  of  human  nature  is  this  : 
it  gives  us  an  understanding  of  the  forces  at  work  in  the  social 
organism  which  we  cannot  command  in  the  case  of  those  living 
organisms  with  which  we  are  familiar.  We  have  already  seen 
that  the  forces  which  animate  the  former  are  the  desires  and 
activities  of  individual  men  who  bear  the  same  relation  to  the 
whole  organism  that  the  molecules  which  make  up  an  animal 
body  bear  to  the  body  itself.  But  in  the  case  of  an  animal  we 
know  nothing  about  the  vital  forces  which  animate  the  mole- 
cules, and  can  only  study  the  organism  from  outside,  as  it  were, 
while  in  economics  we  do  know  all  about  the  motives  which 
animate  men  in  general,  and  can  see  how  these  motives  lead 
to  all  the  forms  of  human  activity.  The  economist  therefore 
has  a  great  advantage  over  the  physiologist  in  being  able  to 
understand  the  working  of  the  minute  machinery  of  which  the 
physiologist  remains  entirely  ignorant. 

18.  The  fundamental  and  most  general  hypotheses  of  po- 
litical economy  may  now  be  formulated  as  follows : 

1.  That  man  is  a  being  moved  to  action  by  an  unlimited 
series  of  desires. 

2.  That  these  desires  can  be  partially  satisfied  by  the  exer- 
tion of  those  faculties,  bodily  and  mental,  with  which  the  Crea- 
tor has  endowed  him. 

3.  That  he  is  a  reasonable  being  capable  of  adapting  means 
to  ends. 

4.  That  in  consequence  of  being  a  reasonable  being  lie  will 
exert  his  faculties  in  such  a  way  as  to  secure  the  maximum 
gratification  of  desires  with  the  minimum  of  inconvenience 
under  the  circumstances  in  which  he  is  actually  placed. 

Our  science  therefore  recognizes  all  the  complicated  ma- 
chinery by  which  human  wants  are  gratified  as  the  result  of 


24         BASIS  AND  METHOD  OF  ECONOMIC  SCIENCE.     [1. 18. 

the  single  prime  moving  force  defined  in  §  2,  namely,  human 
desires.  These  desires  are  to  be  regarded  as  the  first  cause  of 
economic  effects.  And  this  cause,  considered  in  its  relation 
to  the  effects  produced,  is  not  of  the  kind  commonly  investi- 
gated in  physical  science,  but  belongs  to  the  class  of  final  causes. 
The  laws  which  prescribe  how  railroads  shall  be  built,  or  when 
ships  shall  sail,  or  where  manufactories  shall  arise,  can  only  be 
laws  of  human  action ;  and  such  actions  are  determined  by  a 
final  cause,  the  will  of  man.  They  are  subjects  of  scientific 
investigation  only  because,  as  assumed  in  the  third  and  fourth 
of  the  preceding  hypotheses,  we  can  foresee  how  men  will  act 
under  given  circumstances,  by  knowing  what,  from  their  point 
of  view,  will  be  the  course  of  action  best  adapted  to  lead  to 
their  ends. 

It  is  sometimes  considered  that  political  economy  makes  ab- 
straction of  every  human  passion  or  motive  except  the  desire 
of  wealth  and  aversion  to  labor,  and  that  it  represents  man  as  a 
perfectly  selfish  being.  But  this  is  true  only  under  a  great 
modification  of  the  sense  in  which  we  are  to  understand  the 
terms  used.  Man  is  considered  as  a  selfish  being  to  this  extent, 
and  to  this  only,  that  he  has  his  own  desires  which  he  is  exert- 
ing himself  to  gratify.  The  desires  themselves  may  be  of  the 
most  benevolent  kind.  The  labor  of  the  Sunday  scholar  who 
is  trying  to  earn  a  few  pennies  to  put  into  the  missionary-box 
may  be  included  in  the  domain  of  political  economy  as  well  as 
any  other  labor.  A  man  may  spend  his  entire  income  in  send- 
ing missionaries  to  the  heathen  or  in  charitable  objects  with- 
out violating  the  laws  of  political  economy ;  for  it  is  certain 
that  he  will  not  spend  his  money  in  this  way  unless  he  desires 
to  have  the  heathen  converted  or  the  wants  of  his  fellow-men 
relieved.  These  benevolent  desires  are  part  of  the  man's  na- 
ture as  much  as  the  desire  for  a  good  dinner  is.  They  lead 
him  into  making  the  best  bargains  he  can  for  himself  in  buy- 
ing and  selling,  just  as  other  desires  do,  because  the  better 
bargain  he  makes  the  more  money  he  will  have  for  the  heathen 
and  the  poor. 


I.  20.]     SPECIAL  FEATURES  OF  ECONOMIC  METHOD.  25 

19.  The  Deductive  Method.     In  so  far  as  we  can  construct 
a  purely  deductive  science  of  economics,  based  on  the  above 
hypotheses,  our  methods  may  be  stated  in  the  form  of  answers 
to  two  problems,  as  follows : 

PROBLEM  I.  To  foresee  how  men  will  proceed  to  attain  any 
given  end  by  their  industry. 

Method  of  Solution.  Discover,  from  the  condition  in  which 
they  are  placed  and  with  the  knowledge  which  they  possess, 
what  seems  to  them  the  easiest  way  of  attaining  that  end :  that 
way  they  will  adopt. 

PROBLEM  II.  To  find  how  men  will  spend  their  labor. 

Method  of  Solution.  Discover,  from  the  condition  in  which 
they  are  placed  and  from  the  character  of  their  desires,  in 
what  way  they  can  derive  the  maximum  of  enjoyment  from 
their  labor,  in  what  way  they  will  spend  it. 

Were  our  knowledge  of  the  whole  world,  including  every 
man  in  it,  complete  in  every  particular,  and  were  we  able  to 
apply  all  this  knowledge  at  every  moment,  we  might  imagine 
ourselves  to  predict  all  economic  phenomena  by  this  method 
much  as  the  astronomer  predicts  the  motions  of  the  planets. 
Our  knowledge  being  obviously  so  imperfect  that  we  cannot 
predict  in  this  way,  the  preceding  solutions  express,  not  our 
method  of  discovering  facts,  but  our  method  of  arranging  them 
after  they  are  discovered.  That  is  to  say,  having  learned  from 
the  statistics  of  manufactures  and  commerce  what  employments 
men  engage  in,  we  conclude  that  these  are  the  employments 
from  which  they  derive  the  maximum  of  enjoyment.  "We  thus 
can  put  together  our  deductive  chain  by  a  reverse  or  inductive 
process.  But,  so  far  as  the  form  of  our  conclusions  is  con- 
cerned, the  final  result  is  the  same  whether  we  reason  in  one 
direction  or  the  other. 

20.  Requisites  for  the  Deductive  Method.     In  order  to 
apply  the  above  method  the  economist  must  be  supplied  with 
three  classes  of  data. 

First,  the  conditions  which  surround  mankind. 


26          BASIS  AND  METHOD   OF  ECONOMIC  SCIENCE.     [I.  20. 

Secondly,  the  nature  and  objects  of  human  desires. 

Thirdly,  the  extent  and  kind  of  knowledge  which  men 
possess  on  the  subject  of  how  they  may  secure  the  satisfaction 
of  their  desires. 

These  several  data  can  be  found  only  by  observation,  and 
their  discovery  is  therefore  a  process  of  induction  into  which 
abstract  reasoning  should  not  enter.  Let  us  see  in  a  general 
way  what  these  data  are. 

I.  The  general  condition  of   man  is  one  in  which  nature 
offers  him  an  infinite  variety  of  services,  provided  he  will  adopt 
the  proper  means  to  command  those  services.     She  offers  him 
land  by  cultivating  which  he  can  supply  himself  with  food  ; 
she  offers  him  coal  on  condition  that  he  will  dig  it,  and  ores  by 
smelting  which  he  can  supply  himself  with  metals.    She  rewards 
him  for  every  improvement  which  he  will  make  in  his  tools. 
If  he  builds  and  properly  equips  a  mill,  she  will  turn  it  by  the 
power  of  the  wind ;  if  a  steam-engine,  she  provides  him  with 
the  expansive  force  of  steam.      But  she  offers   very  differ- 
ent gifts  to  different  countries.     One  she  supplies  with  a  fer- 
tile soil :  here  man  expends  his  energies  in  raising  wheat  and 
corn.     Another  she  supplies  with  coal  and  iron :   here   man 
becomes  a  miner.      Another   she    supplies  with  timber  and 
water-power :  here  man  becomes  a  manufacturer. 

Men  will  find  out  for  themselves  these  natural  advantages 
very  much  sooner  than  a  political  economist  can  discover 
them  for  him;  no  inductive  logic  is  therefore  necessary  for 
their  discovery. 

II.  The  Character  and  Objects  of  Human  Desire.     The  de- 
sire of  men  for  special  objects  is  in  general  to  be  learned  from 
observation  of  their  acts  on  a  large  scale,  so  that  no  general 
conclusion  can  be  stated.     But  in  the  case  of  civilized  men 
there  is  one  general  characteristic  which  lies  at  the  bottom  of 
the  difference  between  his  state  and  that  of  the  savage.     It  is 
that  he  seeks  to  provide  against  his  future  wants,  as  well  as 
to  gratify  his  present  ones.     Hence  his  future  happiness  is  an 
object  of  present  desire.     We  shall  see  hereafter  that  without 


1. 21.]     SPECIAL  FEATURES  OF  ECONOMIC  METHOD.  37 

this  regard  for  the  future  no  accumulation  of  wealth  would  be 
possible. 

Yet  another  feature  of  the  desires  of  civilized  man  is  that 
they  are  practically  unlimited.  If  every  man  were  satisfied 
as  soon  as  he  had  accumulated  the  things  necessary  to  supply 
his  current  wants,  the  whole  fabric  of  economics  would  be 
changed.  Our  science  takes  account  of  the  fact  that  great 
numbers  of  men  accumulate  all  the  riches  they  can,  regardless 
of  their  already  having  enough  for  their  own  uses. 

III.  Influence  of  Knowledge.  Man  seeks  his  ends,  not 
necessarily  in  that  way  which  is  absolutely  the  easiest,  but  in 
the  easiest  way  he  knows.  As  his  knowledge  increases  he 
discovers  ways  of  increasing  his  power  which  he  did  not 
before  know;  and  so  important  is  this  knowledge  that  it  has 
been  more  instrumental  in  enabling  him  to  improve  his  con- 
dition than  his  labor  has.  Thus,  our  knowledge  of  the  expan- 
sive power  of  steam  has  caused  the  labor  spent  in  making 
engines  to  be  almost  infinitely  more  efficient  than  would  have 
been  the  same  amount  of  labor  without  that  knowledge. 

21.  Limitations  on  our  Knowledge  of  the  Fundamental, 
Data.  Supposing  ourselves  to  be  equipped  with  a  complete 
knowledge  of  all  the  preceding  data,  we  might  be  able  by 
deductive  reasoning  to  predict  and  explain  all  human  acts 
devoted  to  the  production  and  enjoyment  of  wealth.  Unfortu- 
nately, however,  our  knowledge  is  so  limited  that  we  cannot 
make  absolute  predictions  as  we  can  in  a  physical  science. 
The  reason  is  that  many  of  the  data  belong  to  the  future  and 
therefore  cannot  be  foreseen.  Moreover,  we  know  very  little 
about  individual  men,  and  so  we  have  to  reason  about  them  in 
large  masses.  Thus  two  limitations  are  placed  upon  our 
powers  of  foresight,  which  at  first  glance  might  appear  fatal 
to  our  success  as  investigators,  namely  : 

I.  We  know  very  little  about  each  separate  man  ;  we  cannot 
tell  what  notion  may  enter  his  head,  or  how  absurdly  he  may 
behave. 


28          BASIS  AND  METHOD  OF  ECONOMIC  SCIENCE.     [I.  22. 

II.  "We  do  not  know  what  causes  may,  to-morrow  or  next 
year,  come  into  play  to  upset  or  alter  our  conclusions. 

But  an  examination  will  show  that  after  all  there  is  a  great 
deal  of  value  which  we  can  learn,  and  that  these  limitations 
arc  not  so  destructive  to  satisfactory  conclusions  as  they  at  first 
sight  appear.  Let  us  begin  with  a  consideration  of  general 
or  average  results,  to  which  we  are  confined  by  the  first  limi- 
tation. 

22.  The  Law  of  Averages.  "What  we  are  concerned  with 
in  political  economy  is,  not  the  interests  of  single  individuals, 
but  those  of  society  at  large ;  that  is,  the  average  interests  of 
great  masses  of  individuals.  It  is  true,  and  we  must  never 
lose  sight  of  this  truth,  that  the  community  is  made  up  of 
individuals,  and  that  nothing  can  be  beneficial  to  a  community 
unless  it  be  beneficial  to  some  or  all  of  its  members.  But 
since  we  cannot  consider  all  the  members  individually,  we 
must  take  general  averages. 

Now  it  is  a  familiar  fact  that  many  events  which  considered 
individually  are  matters  of  pure  chance  occur  witli  extreme 
regularity  in  the  long-run.  A  familiar  example  is  the  propor- 
tion of  misdirected  letters  and  of  letters  without  direction 
which  are  dropped  into  great  post-offices  like  those  of  London 
and  New  York.  The  number  of  such  letters  increases  almost 
as  regularly,  from  year  to  year,  as  the  number  of  letters  posted. 

Another  example  is  afforded  by  the  tables  of  mortality. 
Although  out  of  the  hundred  thousand  members  of  our  largest 
Life  Insurance  Company  it  is  impossible  to  say  who  will  be 
living  and  who  dead  at  the  end  of  five  years,  the  actuary  cau 
nevertheless  predict  the  total  number  who  will  die  within  that 
time  with  hardly  a  possibility  of  being  wrong  by  5  per  cent. 

As  a  third  example  the  curious  student  may  enumerate  the 
names  found  in  the  directory  of  any  large  city,  and  find  what 
proportion  of  them  are  Smith.  This  proportion,  in  cases 
where  the  numbers  are  large  enough,  will  be  found  to  vary 
wonderfully  little  from  1  in  85.  At  the  census  of  1880  the 


I.  23.]     SPECIAL  FEATURES  OF  ECONOMIC  METHOD.  29 

population  of  Chicago  was  500,000.  This  proportion  would 
give  5882  Smiths,  and  we  may  conclude  with  much  confidence 
that  this  result  is  within  5  per  cent  of  the  truth. 

The  limitations  to  which  economic  investigations  are  sub- 
jected, so  far  as  the  law  of  averages  is  concerned,  may  be 
defined  as  follows : 

I.  In  cases  where  some  individual  opinion  or  habit  is  alone 
concerned,  we  cannot  apply  scientific  method  to  determine  what 
conclusion  the  individual  will  reach.     For  example,  there  is 
no  law  by  which  the  economist  can  determine  beforehand  the 
salary  which  a  railway  manager  or  the  President  of  the  United 
States  can  command.     Presidents  are  too  few  in  number,  and 
railway  managers  too  diverse  in  the  character  of  the  operations 
which  they  control,  to  enable  any  reliable  average  to  be  fixed. 

II.  But  where  the  acts  of  thousands  or  millions  of  men  are 
concerned,  and  where  the  question  is  to  reach  a  conclusion 
respecting  sums  total  in  which  the  part  of  each  separate  in- 
dividual is  so  small  as  to  be  lost  in  the  mass,  we  may  apply 
scientific  method.     This  is  the  case  with  nearly  everything 
which   concerns  the  great  operations    of  agriculture,  manu- 
facture, and  commerce,  the  settlement   of  the  country,   the 
cultivation  of  the  land,  the  raising  of  crops,  their  transporta- 
tion to  market,  the  growth  of  manufactories,  the  prices  of 
goods,  and   countless  other  results  of  human  effort.     When 
considered  in  the  mass,  these  processes  go  on  in  accordance  with 
definite  and  fixed  laws,  which  scientific  method  enables  us  to 
understand  and  investigate. 

23.  Unknown  Economical  Causes.  Suppose  that  we  de- 
sire to  know  what  a  ton  of  Bessemer  steel  will  be  worth  three 
years  from  the  present  time.  It  would  be  impossible  for  any 
economist  to  answer  the  question  owing  to  the  multiplicity  of 
unknown  causes  on  which  the  price  may  depend.  The  supply 
of  crude  iron,  the  discovery  of  new  processes  of  manufacture, 
the  number  of  railways  to  be  built,  the  tariff  to  be  levied,  the 
wages  to  be  paid,  all  come  in  to  influence  the  result. 


30          BASIS  AND  METHOD   OF  ECONOMIC  SCIENCE.     [I.  23. 

But  this  does  not  prevent  us  from  predicting  what  effect  any 
given  cause  will  have  on  the  price  with  almost  as  much  certainty 
as  we  can  predict  the  properties  of  a  chemical  compound  or  the 
power  of  an  engine.  Suppose,  for  instance,  that  an  economist 
is  asked  what  effect  a  diminution  of  ten  per  cent  in  the  tariff 
would  have.  Assuming  him  to  be  a  master  of  scientific  method 
and  to  have  all  the  attainable  data,  he  could  give  his  answer 
with  sufficient  precision  to  afford  a  basis  for  action.  The  same 
remark  would  apply  if  asked  what  effect  a  rise  in  wages  would 
have  upon  the  price,  or  how  the  latter  would  be  influenced  by 
the  building  of  a  railway  across  the  Asiatic  continent  which 
should  require  a  great  amount  of  the  metal.  In  a  word,  the 
fact  that  we  do  not  know  all  the  causes  does  not  prevent  us 
from  predicting  the  effect  of  those  causes  which  we  do  know. 
In  this  respect  political  economy  may  be  compared  to  a  science 
which  tells  a  traveller  exactly  how  fast  a  vehicle  of  any  kind 
will  convey  him,  and  at  what  cost  per  mile,  but  cannot  give  him 
any  estimate  of  the  total  expense  of  his  journey  because  its 
length  is  unknown.  The  science  will  be  of  value  to  him  be- 
cause it  will  enable  him  to  seek  the  cheapest  and  easiest  con- 
veyance notwithstanding  his  ignorance  of  the  absolute  expense. 
We  may  even  say  that  any  criterion  which  will  enable  him  to 
learn  which  conveyance  is  the  quickest  will  be  of  the  same 
value  whether  the  length  of  the  journey  is  known  or  unknown. 

Physiology  and  hygiene  teach  men  the  laws  of  healthy  living, 
by  following  which  they  will  be  enabled  to  prolong  their  lives. 
But  no  science  will  tell  a  man  whether  he  will  be  living  or 

o 

dead  at  the  end  of  ten  years.  This,  however,  does  not  dimin- 
ish the  value  of  the  knowledge  he  actually  possesses  respecting 
the  laws  of  health.  So  the  economist  may  be  able  to  say  to 
the  statesman  who  consults  him  about  a  proposed  reduction  of 
one  dollar  a  ton  in  the  tariff  on  iron,  "  I  do  not  know  what  the 
price  will  be  after  the  reduction  you  propose;  but  this  I  do 
know,  it  will  be  fifty  cents  a  ton  lower  than  it  will  be  if  you 
leave  the  tariff  unchanged,  and  the  importation  from  abroad 
will  be  thirty  per  cent  greater." 


I.  24.]     SPECIAL  FEATURES  OF  ECONOMIC  METHOD.  31 

24.  Summary  of  Results.  The  conclusions  to  which  we 
are  led  by  these  considerations  may  be  summed  up  as  follows : 

I.  The  ability  of  mankind  to  secure  those  objects  of  desire 
for  which  they  spend  a  considerable  portion  of  the  labor  of 
their  lives  is  subject  to  certain  laws  and  limitations,  and  is 
affected  by  a  multitude  of  causes. 

Examples  of  economic  causes  are  :  the  greater  or  less  abun- 
dance of  the  crops ;  the  building  of  new  railways ;  improve- 
ments in  machinery  and  manufactures;  changes  in  the  fash- 
ions and  public  tastes  on  the  subject  of  clothing ;  changes  in 
the  tariff  on  imported  goods  ;  laws  to  regulate  labor ;  combina- 
tions among  workmen  ;  increase  of  population ;  the  discovery 
of  new  mines  of  gold,  silver,  or  other  metals. 

II.  Some  of  these  causes  cannot  be  known  until  after  they 
occur ;  others  can  to  a  greater  or  less  extent  be  foreseen  ;  while 
yet  others  are  the  acts  of  individuals  or  of  governments. 

III.  Economics  is  the  science  which  shows  us  how  these 
numerous  causes  act,  and  thus  enables  us  to  predict  the  effects 
when  the  causes  become  known.     This  is  done  by  taking  the 
machinery  of  the  social  organism  all  to  pieces,  as  it  were,  exam- 
ining its  component  parts,  studying  their  mutual  action  and 
interaction,  so  as  to  learn  the  separate  action  of  each  cause. 

IY.  But  such  predictions  are  generally  confined,  in  the  first 
place,  to  general  average  results  as  affecting  either  the  whole 
mass  of  the  community,  or  great  classes  of  men,  as  farmers,  me- 
chanics, laborers,  etc.  Their  effects  upon  each  individual  may 
thus  to  a  certain  extent  be  foreseen,  but  we  need  not  attempt 
to  predict  how  any  given  individual  will  act  in  consequence. 

V.  Such  predictions  are  subject  to  the  further  limitation 
that  the  final  result  is  liable  to  be  modified  by  the  coming  into 
play  of  unknown  or  unforeseen  causes.  But  this  does  not  gen- 
erally alter  the  relative  effect. 

YI.  The  economist  has  completely  attained  the  object  of 
his  science  when  he  has  learned  how  to  predict  the  effect  of 
any  cause  whatever  upon  the  interests  of  each  class  of  men 
and  not  before. 


32          BASIS  AND  METHOD  OF  ECONOMIC  SCIENCE.     [1. 25. 


CHAPTER  V. 

FALLACIOUS   VIEWS   OF    ECONOMIC   METHOD. 

25.  THE  object  of  the  present  chapter  is  to  point  out  cer- 
tain misapprehensions  respecting  economic  method,  which  are 
closely  related  to  the  subject  of  the  preceding  chapter.  The 
most  common  mistake  made  by  those  interested  in  the  subject 
is  that  of  looking  upon  the  propositions  of  political  economy 
as  real  or  pretended  absolute  truths  which  can  be  applied 
without  regard  to  time,  place,  or  circumstances.  The  fact  is 
that  these  propositions  are  true  only  under  certain  conditions, 
which  conditions  may  or  may  not  admit  of  specification.  Hence 
no  one  can  correctly  apply  the  method  of  economics  without  a 
clear  appreciation  at  each  step  of  the  conditions  which  may 
modify  the  conclusion.  The  following  is  an  instructive  illus- 
tration : 

It  is  a  general  fact,  accepted  as  the  basis  of  an  extended 
branch  of  economics,  that  by  increasing  the  price  offered  for 
an  article  its  manufacture  is  stimulated.  The  traders  in  a  cer- 
tain South  American  port  once  found  a  profitable  business  in 
purchasing  a  particular  kind  of  basket  which  the  natives  sup- 
plied at  a  very  cheap  rate.  The  price  for  which  the  traders  could 
sell  these  baskets  in  their  own  country  was  so  many  times  greater 
than  that  which  they  paid  for  them  that  they  thought  to  in- 
crease their  profits  by  offering  a  double  price  to  the  natives 
for  the  articles.  The  result  was,  however,  that  instead  of  the 
natives  being  stimulated  to  produce  more  of  these  baskets  the 
supply  was  actually  reduced  to  one  half.  Investigation  showed 
that  the  natives  needed  only  a  limited  quantity  of  the  trinkets 
or  money  which  they  received  for  their  baskets,  and  that  they 
could  not  be  induced  to  make  more  baskets  than  would  supply 
them  with  this  minimum.  Accordingly,  when  they  found  that 


1.27.]     FALLACIOUS  VIEWS  OF  ECONOMIC  METHOD.  33 

they  could  get  their  supplies  in  exchange  for  half  as  many 
baskets  as  they  had  formerly  made,  their  inherent  idleness  led 
them  to  reduce  their  manufacture. 

Here,  then,  was  a  case  in  -which  a  law  of  economics  was 
completely  reversed.  The  explanation  is  that  this  law  tacitly 
presupposes  a  state  of  things  which  exists  only  among  civi- 
lized men,  namely,  a  desire  for  all  the  money  one  can  get  and 
a  little  more.  Change  this  condition,  make  man  want  nothing 
but  coarse  food,  coarse  clothing  and  shelter,  and  the  whole  sci- 
ence of  economics  will  have  to  be  reconstructed. 

26.  The  Doctrinaire's  Error.     Through  failing  to  see  this 
dependence  of  all  economic  propositions  upon  certain  con- 
ditions men  fall  into  two  opposite  errors.     The  first  error  is 
that  of  the  "doctrinaire,"  who  makes  and  applies  sweeping 
generalizations  without  a  detailed  examination  of  the  causes 
which  may  act  to  modify  the  results  which  he  so  confidently 
predicts.     There  can  be  no  absolute  conclusions  in  economics, 
and  no  result  can  be  asserted  as  positive,  until  all  the  causes 
which  may  affect  it  have  been  considered.     What  the  science 
does  for  us  is,  not  to  predict  the  result,  but  to  show  us  the 
methods  by  which  we  can  predict  it  ourselves  when  we  know 
the  causes  and  have  measured  the  influence  of  each  cause.     It 
is  not  like  a  map  in  which  is  laid  down  every  stone  and  pitfall 
in  some  mammoth  cave,  but  rather  like  a  lantern  in  the  hands 
of  an  explorer  by  the  aid  of  which  he  can  discover  all  the 
stones  and  pitfalls  for  himself. 

27.  The  Popular  Error.     There  is  a  large  and  influential 
body  of  men  who  view  the  subject  from  the  same  point  as  the 
doctrinaire  ;   that  is,  they  assume  that  economic  science  should 
be,  or  at  least  that  it  pretends  to  be,  a  complete  body  of  doc- 
trine which  will  enable  the  inquirer  to  get  at  truth  by  purely 
deductive  reasoning.  When  they  find  this  supposed  pretension 
to  be  wholly  unfounded,  they  conclude  that  we  must  either 
reject  or  completely  reconstruct  the  science.     We   call   this 

3 


34          BASIS  AND  METHOD  OF  ECONOMIC  SCIENCE.     [1. 27. 

view  the  popular  one  because  it  is  one  which  men  seem 
naturally  prone  to  take.  When  the  men  who  have  studied 
economics  in  college  go  out  into  the  world,  they  find  that  the 
phenomena  they  actually  meet  with  are  much  more  complex, 
and  are  affected  by  a  much  more  intricate  combination  of 
causes,  than  are  presupposed  in  the  science  they  have  learned 
from  their  books.  In  studying  the  latter  they  have  been  led 
to  consider  the  science  as  something  exact  and  positive;  and  as 
they  gradually  find  by  experience  of  the  world  that  it  is  neither 
exact  nor  positive,  and  that  the  actual  course  of  trade  often  de- 
viates from  that  which  they  supposed  to  be  marked  out  by  eco- 
nomical theories,  they  too  hastily  conclude  that  the  latter  are 
worthless.  The  fact  is  that  this  defect  is  inherent  in  all  science 
when  we  consider  the  latter  in  its  practical  applications.  For 
example,  the  engineer  student  begins  by  learning  a  science 
which  is  called  mechanics.  If  he  applies  the  results  of  this 
science  without  any  modification  or  allowance  for  circum- 
stances, he  will  find  his  calculations  contradicted  by  the  facts. 

Owing  to  this  necessary  defect  a  disposition  to  undervalue 
the  practical  usefulness  of  pure  science  is  prevalent  among  all 
classes.  Yet  without  science  we  should  have  nothing  but 
vague  speculation,  inconclusive  reasoning,  and  general  confu- 
sion of  thought ;  while  with  it  we  have  a  collection  of  princi- 
ples which,  although  they  cannot  be  blindly  applied,  are  never- 
theless of  inestimable  value  to  one  who  understands  them. 

A  careful  consideration  of  the  process  of  abstraction  (§  15) 
will  enable  the  student  to  see  the  origin  of  this  difficulty  in 
applying  scientific  conclusions.  It  is  that  the  conclusions  of 
pure  science  necessarily  presuppose  that  no  other  cause  than 
those  which  it  considers  comes  into  play.  Now  it  is  impos- 
sible in  economics  to  consider  every  possible  cause  which  may 
modify  the  result.  All  we  can  do  is  to  trace  out  the  action  of 
general  far-reaching  causes  as  they  affect  great  bodies  of  peo- 
ple, leaving  it  to  the  individual  himself  to  see  how  they  are 
modified  by  the  peculiar  circumstances  of  each  case. 

Some  writers  require  much  more  of  our  science  than  that  it 


I.  28.]      FALLACIOUS  VIEWS  OF  ECONOMIC  METHOD.  35 

shall  be  applicable  -without  modification  to  the  most  complex 
phenomena  of  human  society.  They  also  demand  that  it  shall 
be  applicable  to  every  state  of  things  which  their  imagination 
can  invent  or  their  research  discover.  It  is  sufficient  to  say 
that  such  a  requirement  can  proceed  from  nothing  but  defec- 
tive knowledge,  since  no  science  whatever  in  any  form  could 
fulfil  such  a  condition. 

28.  If,  in  thus  rejecting  all  economic  propositions,  men  had 
nothing  to  substitute  for  them,  their  views  would  have  at  least 
the  merit  of  consistency.  But  there  is  a  popular  method  of 
thinking  on  the  subject  which  consists  in  tacitly  assuming  that 
whatever  is  seen  to  follow  any  cause  is  the  effect  of  that  cause. 
For  example :  to  the  question,  "  How  would  you  determine  the 
effect  of  a  change  in  the  tariff  ?"  the  answer  of  the  majority  is, 
"  I  would  wait  and  see  the  effect."  This  method  is  defective 
because  every  fact  that  we  can  observe  is  the  product  of  a  mul- 
tiplicity of  different  causes.  For  example,  a  fall  in  the  price 
of  iron  may  arise  from  the  discovery  and  opening  up  of  new 
mines,  from  a  falling  off  in  the  building  of  railways,  from  a  di- 
minished demand  from  abroad,  from  the  discovery  at  home  or 
abroad  of  improved  methods  of  manufacture,  as  well  as  from  a 
change  in  the  tariff.  In'  consequence  it  might  well  happen 
that  after  the  tariff  on  imported  iron  was  raised  the  iron  would 
be  cheaper  than  before,  and  that  it  might  be  dearer  after  the 
tariff  was  lowered.  It  would  therefore  be  illogical  to  conclude 
that  the  fluctuations  in  price  were  due  to  any  one  cause  until 
all  the  causes  were  investigated.  This  example  should  make 
it  perfectly  clear  to  the  student  that  there  is  no  rational  method 
of  tracing  cause  and  effect  in  economics,  except  to  begin  by  con- 
sidering the  action  of  the  various  causes  one  at  a  time. 

But  the  main  defect  of  the  popular  method  is  that  of  ignor- 
ing what  we  may  call  the  self-sufficiency  of  man,  and  of  looking 
upon  man  as  a  victim  of  blind  forces  which  he  follows  as  a  leaf 
follows  the  course  of  the  wind.  The  fact  is  that  men  in  mak- 
ing their  bargains  and  doing  their  work  are  not  the  creatures 


36         BASIS  AND  METHOD  OF  ECONOMIC  SCIENCE.     [1. 29. 

of  any  such  forces.  They  may  be  relied  upon  to  take  the  best 
possible  measures  for  guarding  their  own  interests,  and  their 
movements  are  determined  by  their  own  wills  and  not  by  any 
blind  laws  which  we  can  formulate  from  statistics. 

29.  This  way  of  looking  at  economic  phenomena  is  so  natu- 
ral that  some  illustrations  of  its  dangers  may  be  adduced.  Let 
us  suppose  an  investigator  seeking  to  learn  the  relation  between 
quinine  and  the  public  health  by  statistical  observation.  He 
might  reason  thus:  "If  quinine  conduces  to  the  cure  of  inter- 
mittent fever,  then  where  people  take  most  quinine  they  will 
have  least  intermittent  fever,  and  each  new  importation  of 
quinine  will  be  followed  by  an  improvement  in  the  public 
health.  But  looking  at  the  facts  of  the  case,  we  find  them  to 
be  directly  the  reverse  of  this.  In  the  low  lands  along  the 
lower  part  of  the  Mississippi  valley  and  among  the  swamps  of 
the  Gulf  States  people  take  more  quinine  than  anywhere  else 
in  the  country.  Yet,  far  from  being  more  healthy,  they  suffer 
from  intermittent  fever  more  than  any  other  people.  Not  only 
so,  but  we  find  that  the  large  importations  of  quinine  which 
take  place  annually  in  the  summer  are  regularly  followed  in 
the  autumn  by  an  increase  in  the  frequency  of  intermittent 
fevers.  Therefore  let  the  advocates  of  quinine  propound  what 
abstract  reasons  they  please,  the  facts  are  against  them  and 
show  conclusively  that  quinine  causes  intermittent  fever  in- 
stead of  curing  it." 

This  example  belongs  to  the  class  which  the  reader  who 
desires  to  train  himself  in  habits  of  accurate  thought  should 
study  very  closely.  What  is  the  defect  in  the  logical  process 
by  which  the  conclusion  is  reached  ?  We  have  a  phenomenon, 
intermittent  fever;  we  have  a  cause,  quinine.  The  relation  of 
the  two  is  fully  proved.  The  only  question  that  can  arise  is 
whether  the  fever  is  the  cause  of  the  quinine  or  the  quinine 
the  cause  of  the  fever.  Since  the  introduction  of  the  quinine 
precedes  the  annual  breaking  out  of  the  fever,  we  have  in  the 
former  hypothesis  the  apparent  difficulty  that  the  effect  comes 


1.30.]     FALLACIOUS  VIEWS  OF  ECONOMIC  METHOD.  37 

before  the  cause.  To  the  average  unthinking  man,  looking  at 
society  from  the  outside,  this  difficulty  would  be  insurmounta- 
ble. But  when  we  recognize  in  men  the  quality  of  adapting 
means  to  future  ends,  we  see  that  if  we  arrange  events  accord- 
ing to  the  order  in  which  we  observe  them  the  effect  may  pre- 
cede the  cause.  The  general  cause  of  the  annual  importation 
of  quinine  is  the  belief  on  the  part  of  great  bodies  of  men  that 
the  fever  will  break  out.  Now,  belief  is  a  mental  state  leading 
to  action  on  the  part  of  men  ;  and  if  we  ignore  it,  and  the  con- 
sequent adaptation  of  means  to  future  ends,  we  not  only  lose 
a  valuable  means  of  explaining  economic  phenomena,  but  we 
run  the  danger  of  falling  into  error. 

The  reader  may  inquire  whether  there  is  really  any  danger 
that  people  should  fall  into  errors  so  gross  as  that  above  sup- 
posed. We  reply  by  asking,  Why  do  they  not  fall  into  that 
very  error  ?  The  reply  to  this  last  question  is  that  the  error 
itself  is  so  obvious  that  there  is  no  danger  of  falling  into  it. 
The  common-sense  of  the  average  man  familiarizes  him  with 
the  whole  process.  Common-sense  is  the  lantern  by  which  he 
sees  the  relation  of  things.  But  if  the  process  is  not  familiar 
to  him,  if  this  lantern  does  not  shine,  then  he  is  in  darkness 
so  far  as  this  way  of  seeing  his  error  is  concerned,  and  he  will 
inevitably  fall  into  mistakes  of  the  kind  above  illustrated.  We 
have,  only  to  read  the  newspapers  and  the  writings  of  great 
numbers  of  intelligent  men  to  find  any  quantity  of  reasoning 
of  the  form  of  that  above  given ;  and  how  are  we  to  know  when 
its  conclusions  are  right  and  when  they  are  wrong? 

3O.  At  first  sight  it  may  seem  discouraging  to  the  student 
to  ask  him  to  devote  much  close  thought  to  a  science  all  of 
whose  rules  and  conclusions  are  imperfect.  But  there  is  no 
occasion  for  such  discouragement.  If  he  has  carefully  mastered 
the  spirit  of  this  and  of  the  preceding  chapter,  he  will  see  that 
the  imperfections  which  we  have  just  been  describing  are  only 
those  which  are  common  to  all  human  knowledge.  No  knowl- 
edge of  the  future  affairs  of  mankind  is  perfect,  because  we 


38          BASIS  AND  METHOD  OF  ECONOMIC  SCIENCE.     [I.  80. 

cannot  possibly  tell  what  causes  may  come  into  play  to  disap- 
point our  expectations.  But  notwithstanding  these  imperfec- 
tions, we  can  form  more  or  less  probable  judgments  of  the 
action  of  causes  and  effects  in  the  world  generally  which  are  of 
the  greatest  value.  The  imperfections  of  political  economy  are 
less  than  those  of  meteorology. 

We  may  compare  the  prediction  of  a  specific  future  eco- 
nomic event  to  an  attempt  to  predict  the  weather  on  the  8th 
of  January  of  some  future  year.  We  can  make  no  such  pre- 
diction with-  any  approach  to  certainty.  Are  we  to  conclude 
from  this  that  no  attempt  to  foresee  changes  of  weather  and  of 
seasons  is  of  any  value  ?  Not  at  all.  We  know  that  the  sea- 
sons go  through  an  annual  course  ;  that  the  weather  is  hot  in 
July  and  August,  and  then  on  the  average  grows  colder  until 
January.  We  make  our  plans  for  seed-time  and  harvest,  for 
winter  fuel  and  summer  journeys,  with  well-founded  confi- 
dence that  the  changes  of  seasons  will  go  through  their  regular 
course.  Now,  rejecting  the  conclusions  of  political  economy 
on  the  ground  that,  being  uncertain,  they  can  be  of  no  practi- 
cal value  is  like  rejecting  all  the  rules  about  seed-time  and 
harvest  because  meteorology  can  never  tell  us  what  kind  of 
weather  we  shall  have  on  any  particular  day.  We  must  do  in 
economics  just  as  we  would  do  in  the  scientific  investigation  of 
all  other  general  causes.  We  must  frame  hypotheses  which 
shall  come  as  nearly  as  possible  to  the  general  average  of  things 
as  they  exist,  in  the  world.  Every  observing  man  has  fairly 
clear  ideas  as  to  how  men  in  general  act ;  that  is  to  say,  he  has 
a  certain  conception  of  an  average  or  typical  man.  From  this 
type  every  man  we  meet  may  differ  in  some  detail,  yet  it  strikes 
a  general  average  amongst  them.  But  it  does  not  at  all  follow 
that  we  are  to  stop  here  and  assume  that  no  other  man  than 
this  average  one  exists.  We  may  go  on  and  classify  men  in 
regard  to  their  differences  from  the  average  man  t&  any.  extent 
we  please.  What  we  have  to  do  is  to  be  careful  that  our  classi- 
fication corresponds  as  nearly  as  possible  to  the  actual  charac- 
teristics of  men. 


1.31.]      FALLACIOUS  VIEWS  OF  ECONOMIC  METHOD.  39 

"We  have  to  carry  the  same  system  through  our  whole  study. 
We  must  at  every  step  distinguish  between  far  and  wide  reach- 
ing average  causes  affecting  large  classes  of  men,  and  the  tem- 
porary disturbing  causes  which  sometimes  act  in  one  direction 
and  sometimes  in  another.  By  proceeding  in  this  way  we  shall 
find  human  society  to  be  a  most  interesting  and  satisfactory 
object  of  study,  in  which  we  can  trace  the  action  of  cause  and 
effect  with  nearly  as  much  certainty  as  we  can  trace  out  any 
system  of  natural  operations  going  on  in  the  world. 

31.  With  fallacies  respecting  economic  method  we  may 
associate  certain  imperfections  in  ways  of  thinking  to  which 
mankind  are  prone,  and  which  every  student  of  science  should 
carefully  train  himself  to  avoid.  The  most  common  defect  of 
this  kind  is  that  of  confounding  statements  of  how  things  are 
with  statements  how  we  would  like  them  to  be,  or  how  things 
might  or  ought  to  be.  Those  who  pursue  inquiries  in  a  purely 
partisan  spirit,  for  the  purpose  of  proving  some  theory  or 
bringing  about  some  result,  are  naturally  prone  to  this  defect. 
The  defect  sometimes  reaches  such  proportions  that  the  person 
affected  by  it  becomes  incapable  of  understanding  a  truth  sim- 
ply as  a  truth,  and  cannot  conceive  the  state  of  mind  of  one 
who  describes  things  as  they  are  without  any  ulterior  purpose. 

Now  science  is  primarily  concerned  with  things  as  they  are. 
Just  as  no  astronomer  ever  claimed  that  Jupiter  was  any  too 
large,  or  that  those  nearly  invisible  little  planets  which  are 
being  discovered  every  year  are  a  great  deal  too  small,  so  the 
economist,  considered  as  a  purely  scientific  inquirer,  pursues 
his  investigations  Avithout  any  spirit  of  praise  or  depreciation. 
His  business  is  to  describe  human  society  exactly  as  it  is,  feel- 
ing that  the  question  how  he  would  like  it  to  be,  or  how  it 
ought  to  be,  belongs  to  another  branch  of  the  subject. 

It  does  not  follow  from  all  this  that  the  student  of  economics 
or  any  one  else  should  divest  himself  of  human  sympathies  and 
refuse  to  consider  what  men  ought  to  do  to  promote  their  in- 
terests. It  is  not  necessary  that  he  should  absolutely  confine 


40         BASIS  AND  METHOD  OF  ECONOMIC  SCIENCE.     [I.  31. 

himself  to  what  we  have  above  defined  as  the  field  of  scientific 
economics.  But  what  he  must  carefully  do  is  to  distinguish  be- 
tween his  thoughts  as  a  scientific  economist  and  his  feelings  as 
a  promoter  of  human  welfare.  The  defect  we  have  described 
does  not  consist  in  a  person  feeling  an  interest  in  how  things 
ought  to  be,  and  how  ends  can  be  attained,  but  it  consists  in 
confusing  this  feeling  with  statements  of  fact.  We  cannot 
form  the  best  judgment  of  what  society  ought  to  do  to  promote 
its  own  welfare  until  we  understand  as  well  as  possible  what 
the  state  of  things  in  society  really  is.  We  must  therefore 
begin  by  studying  economical  causes  without  any  sentiment  of 
praise  or  blame,  and  without  any  feeling  that  we  wish  they  were 
otherwise  or  that  we  are  glad  they  are  as  we  find  them.  When 
we  have  done  this,  and  not  before,  we  shall  be  able  to  form  an 
intelligent  judgment  about  questions  of  the  policy  which  society 
ought  to  pursue  in  order  to  secure  its  own  well-being. 

A  common  mistake  is  that  the  conclusions  of  the  plain  un- 
lettered man  differ  from  those  of  economists  in  being  more 
immediately  founded  on  observed  facts  and  less  on  deduction. 
The  truth  is  that  the  plain  unlettered  man  is  more  prone  to 
rely  on  deduction  from  unproved  hypotheses  than  the  econo- 
mist is.  All  classes  must  equally  use  deduction,  because  it  is 
only  by  this  logical  process  that  we  form  any  conclusion  about 
the  future  effect  of  any  present  cause.  Drawing  the  conclu- 
sion that  rain  will  follow  a  certain  direction  of  the  wind  with 
certain  appearances  of  the  clouds  is  an  act  of  logical  deduction. 
The  main  point  in  which  men's  logical  methods  differ  lies  in 
the  care  with  which  hypotheses  are  formed  by  induction  from 
observed  facts,  and  the  readiness  of  men  to  test  them.  Now 
it  is  the  plain  man  who  is  most  prone  to  form  hasty  generaliza- 
tions from  insufficient  facts,  to  consider  the  conclusions  which 
he  thence  deduces  as  final,  and  to  be  blind  to  all  facts  which  do 
not  tally  with  his  theory.  One  object  of  science  is  to  train 
men  into  the  habit  of  carefully  taking  account  of  all  facts 
whether  they  do  or  do  not  agree  with*  their  hypotheses. 


ILLUSTRATIONS  AND  EXERCISES.  41 


ILLUSTRATIONS  AND  EXERCISES. 

1.  By  virtue  of  the  force  of  gravitation  acting  on  its  waters,  a  river 
tends  to  flow  in  a  smooth  and  equable  course  from  its  source  to  the  sea. 

The  doctrinaire  is  one  who  hence  concludes  that  all  rivers  flow  in  straight 
lines  to  the  sea,  and  rejects  all  testimony  that  the  course  of  inauy  rivers  is 
exceedingly  tortuous. 

The  ' '  practical "  or  unscientific  economist  is  one  who,  finding  the  river 
to  wind  about  in  all  directions,  denies  or  ignores  any  special  tendency  in 
its  waters  to  approach  the  sea,  and  regards  the  idea  of  those  waters  being 
urged  forward  by  any  one  single  force,  like  that  of  gravitation,  as  entirely 
illusory. 

The  common-sense  economist  is  one  who  recognizes  all  the  meander- 
ings  of  the  river,  yet  never  forgets  that  its  waters  are  at  every  point  of  their 
course  urged  toward  the  sea  by  the  single  force  of  gravitation,  and  that  they 
change  their  direction,  not  because  the  force  is  nullified,  but  because  its 
direction  is  modified  by  the  hills,  rocks,  and  other  obstacles  it  is  continually 
encountering.  So,  in  economics,  he  never  forgets  that  the  one  cause  which 
keeps  all  the  wealth-getting  processes  in  operation  is  the  desire  of  wealth  by 
each  individual  man,  and  never  fails  to  recognize  any  case  in  which  the 
action  of  this  cause  is  modified  by  circumstances. 

2.  It  is  laid  down  as  a  general  principle  in  economics  that  there  can- 
not  be  two  rates  of  wages  in  the  same  community  for  the  same  kind 
of  work.     A  man  was  discovered  in  New  York  who  paid  his  coachman 
twice  the  wages  that  other  people  paid  for  the  same  services  for  no  better 
reason  than  that  the  coachman  had  been  a  favorite  of  his  father's.     To  what 
extent,  if  at  all,  is  it  necessary  to  modify  the  doctrine  of  the  equality  of 
wages  in  consequence  of  this  discovery  ? 

8.  Can  you  give  any  reasons  for  or  illustrations  of  the  proposition 
that  the  impartial  study  of  things  as  they  are  must  precede  our  considera- 
tion of  any  or  all  questions  of  policy? 

4.  Consider  the  following  view  of  the  cause  why  men  tend  to  congre- 
gate in  great  cities;  state  your  opinion  of  its  correctness,  and,  if  you  think 
it/  wrong,  state  the  cause  in  a  form  which  you  consider  correct: 

"Men  tend  of  necessity  to  gravitate  towards  their  fellow-men;  the  greater 
the  number  collected  in  a  given  space  the  greater  is  the  attraction  there 
exerted — as  is  seen  to  have  been  the  case  with  the  great  cities  of  the  ancient 
world,  and  is  now  seen  in  the  great  cities  of  modern  times.  London  and 
Paris  may  be  regarded  as  the  rival  suns  of  our  system,  which  exercise  a 
strong  attractive  force;  and  were  it  not  for  the  existence  of  a  counter-attrac- 
tion of  local  centres  like  Vienna  and  Berlin,  Florence  and  Naples,  etc., 


42  BASIS  AND  METHOD  OF  ECONOMIC  SCIENCE. 

Europe  would  present  to  view  ouc  great  centralized  system,  the  population 
of  which  was  always  tending  towards  those  two  cities,  there  to  make  all 
their  exchanges  and  thence  to  receive  their  laws."  (CAKEY,  Principles  of 
Social  Science,  Chap.  II.  Sec.  I.) 

Consider  principally  the  question  whether  if  the  lesser  capitals  did  not 
exist  there  would  be  a  greater  tendency  towards  the  great  ones.  Is  there 
any  such  attraction  as  that  described,  and,  if  so,  what  is  its  nature? 

5.  "Science  requires  laws,  and  laws  arc  but    universal    truths,   truths 
to  which  no  exceptions  can  be  found."    (Ibid.,  Chap.  I.  Sec.  VI.) 

State  under  what  limitations  of  meaning,  if  any,  this  proposition  is  cor- 
rffct.  Can  you  think  of  any  law  which  will  enable  you  to  foresee  what  will 
happen  to-morrow  with  absolute  certainty?  Is  there  any  law  to  which  no 
exception  can  be  found?  If  not,  is  it  fair  to  suppose  that  laws  are  of  no 
use? 

6.  "Were  you  to  invent  a  new  form  of  steam-engine  and  could  you  find 
but  two  persons  to  consult  with,  the  one  a  practical  engineer  who  had  spent 
his  life  in  running  a  particular  kind  of  engine  but  knew  nothing  of  the 
theories  of  thermo-dynamics,  the  other  a  mathematician  who  had  mastered 
thermo-dynamics  but  had  never  seen  an  engine  at  work,  which  would  you 
regard  as  the  better  authority  for  advising  you  how  your  engine  would  be 
likely  to  succeed  ? 

Can  you  form  any  general  definitions  of  the  class  of  questions  which 
could  bo  best  answered  by  the  mathematician  and  the  class  which  could 
best  be  answered  by  the  engineer  ? 

7.  Can  you  apply  any  general  principles  of  the  kind  suggested  by  the 
preceding  question  to  the  case  of  advising  a  government  on   a  financial 
question  ?    If  the  Mexican  Government  desired  to  raise  a  loan  in  the  New 
York  money  market,  would  it  act  more  wisely  in  consulting  the  bankers  of 
New  York  or  the  political  economists  ?    If  it  proposed  to  introduce  a  new 
system  of  currency  such  as  had  never  before  been  tried,  ought  it  to  consult 
the  bankers  or  the  economists  ? 

8.  In  continuation  of  the  same  subject.  If  we  admit  the  principle  that  men 
of  most  experience  should  always  be  consulted  upon  a  difficult  question, 
in  what  class  of  questions  should  we  say  that  practical  bankers  had  more 
experience  than  economists,  and  in  what  class  should  we  say  that  economists 
were  more  experienced  than  bankers  ? 

9.  Examine  and  criticise  the  following  objection  to  the  practical  value 
of  scientific  method: 

Scientific  method  considers  the  course  of  events  as  going  on  in  accord- 
ance with  certain  formal  laws  the  results  of  which  it  shows  us  how  to 
predict.  Now  if  all  the  phenomena  with  which  men  are  concerned  went 


ILLUSTRATIONS  AND  EXERCISES.  43 

on  in  this  formal  way,  our  scientific  method  -would  be  very  valuable.  But 
in  fact,  a  great  majority  of  the  events  with  which  men  are  concerned  are  the 
result  of  such  a  multitude  of  causes  that  they  cannot  be  reduced  to  these 
simple  laws.  Scientific  method  is  of  no  value  in  such  cases,  and  the  result 
must  be  a  matter  of  practical  judgment. 

Consider  the  soundness  of  this  proposition  in  the  light  of  such  questions 
as  the  following: 

Is  scientific  method  more  or  leas  necessary  because  we  cannot  formulate 
a  set  of  principles  which  can  be  applied  without  modification  to  all  cases  ? 
If  a  new  kind  of  railway  bridge  is  to  be  built,  it  may  be  found  that  no  ex- 
perience gained  from  other  bridges  and  no  calculations  made  for  them  will 
apply  to  the  case  of  the  new  bridge  under  contemplation.  Does  this  inap- 
plicability of  experience  render  scientific  method  more  or  less  necessary  in 
making  calculations  for  the  proposed  bridge  ? 

10.  Compare  the  following  two  cases:  first,  that  of  a  miserly  selfish  man 
whose  energies  are  devoted  entirely  to  the  accumulation  of  wealth  for  him- 
self; secondly,  that  of  a  man  who  devotes  his  labor  and  his  fortune  to  the 
relief  of  suffering  humanity.    Is  there  any  difference  in  the  method  of  in- 
vestigation which  we  have  to  apply  to  the  two  cases?    Is  it  or  is  it  not  true 
that  the  men  are  equally  following  the  bent  of  their  nature  ;  and  that  the 
relation  between  their  nature  and  the  acts  which  we  see  them  perform  are 
the  same  in  the  two  cases  ? 

Nearly  all  of  us  contemn  the  first  of  the  above  men  and  love  the  other. 
Is  the  existence  of  these  sentiments  of  love  and  contempt  of  use  or  benefit 
in  the  work  of  analyzing  the  acts  of  the  men  ? 

11.  Examine  and  criticise  the  following  objections  to  the  method  and 
hypotheses  of  political  economy  as  laid  down  in  Chapter  IV. : 

I.  "We  cannot  make  these  general  hypotheses  of  human  nature  the  basis 
of  any  reliable  investigation  into  economic  phenomena,  because  these  phe- 
nomena depend  upon  a  great  variety  of  circumstances  not  included  in  the 
hypotheses.     Every  successive  generation  is  placed  under  new  conditions, 
and  the  circumstances  which  surround  every  people  are  different  in  impor- 
tant points  from  those  whicli  surround  other  peoples. 

II.  It  is  very  unsafe  to  assume  that  men   always  act  reasonably  in 
adapting  means  to  ends.     The  fact  is,  man  is  a  very  uncertain  and  variable 
being,  and  it  is  a  good  deal  safer  to  assume  that  we  find  him  just  as  we 
see  him  act  than  to  frame  any  theories  founded  on  his  nature  or  mental 
constitution. 

III.  The  conditions  of  different  nations  being  different,  we  cannot  frame 
any  system  of  political  economy  which  will  apply  to  more  than  one  nation. 
Hence  any  idea  that  there  is  a  general  science  of  economics  is  without 
foundation. 

With  reference  to  the  first  objection,  consider  and  decide  whether  in 


44          BASIS  AND  METHOD  OF  ECONOMIC  SCIENCE. 

assuming  the  hypothesis  of  §  18  we  are  obliged  to  ignore  any  of  the  con- 
ditions or  circumstances  which  surround  mankind. 

lu  reference  to  the  third  question,  consider  whether  there  is  anything 
common  in  the  economic  phenomena  of  different  civilized  nations.  Is 
the  general  system  of  producing,  transporting,  and  selling  goods  radically 
different  in  Germany,  England,  and  America — that  is  to  say,  are  there  any 
features  of  these  processes  common  to  all  these  countries? 

12.  What  is  the  fallacy,  if  any,  in  the  following  reasoning  ? 

Where  we  see  fine  marble  houses,  public  fountains,  and  paved  streets 
we  know  that  people  are  wealthy.  Therefore  if  a  community  would  be- 
come wealthy  as  fast  as  possible  it  must  proceed  to  the  erection  of  marble 
buildings,  the  paving  of  streets,  and  the  construction  of  fountains  as  rapidly 
as  possible. 

13.  When  in  1885  the  government  invited  bids  for  supplying  iron  beams 
for  the  new  War  Department  building  in  Washington,  it  was  found  that 
the  lowest  bidder  knowingly  agreed  to  supply  the  beams  below  the  lowest 
price  at  which  he  could  buy  them.     Is  it  to  be  supposed  that  he  did  this 
from  patriotism,  from  a  desire  to  benefit  his  country,  or  from  other  motives 
forming  an  exception  to  the  hypotheses  of  economics? 


BOOK  II. 
STRUCTURE  AND  FUNCTIONS 


OF  THE 


SOCIAL    OROANISM. 


BOOK  IL— DESCRIPTION  OF  THE  SOCIAL 
ORGANISM. 

DIVISION  A.— DEFINITIONS  AND  OUTLINE. 


CHAPTEK  I. 

OF    WEALTH   AND   ITS   ASSOCIATED   CONCEPTS. 

1.  Remarks  on  Economic  Nomenclature.  An  exact  no- 
menclature is  one  of  the  first  requirements  of  an  exact  science. 
But  economics  is  so  peculiar  in  its  nature  as  to  render  this 
requirement  very  difficult  of  fulfilment.  In  most  other  sci- 
ences things  are  classified  according  to  their  own  inherent 
qualities.  But  in  the  present  one  things  have  to  be  classified, 
not  merely  with  respect  to  such  qualities,  but  rather  according 
to  their  relation  to  human  desires.  We  have  to  associate  things 
so  purely  mental  as  human  hopes  and  fears  with  things  so 
purely  material  as  ships,  ploughs,  and  steam-hammers.  Thus 
we  encounter  the  necessity  of  arranging  things  with  reference 
to  the  mental  emotions  which  they  are  calculated  to  excite. 
One  consequence  of  this  is  that  an  object  which  may  belong 
to  one  class  if  owned  by  one  person  may  belong  to  a  different 
class  when  he  sells  it  to  his  neighbor.  Such  anomalies  are 
inherent  in  the  subject,  and  can  be  reduced  to  order  only  by 
the  reader  keeping  well  in  mind  what  is  meant  in  each  par- 
ticular case  where  terms  of  peculiar  signification  are  applied. 

As  a  rule,  no  new  words  have  been  introduced  into  econo- 
mics. What  has  been  done  is  to  extend  and  generalize  the 
meaning  of  familiar  words.  Such  words  we  shall  now  proceed 
to  define. 


48  DESCRIPTION  OF  THE  SOCIAL  ORGANISM.         [II.  8. 

2.  Labor.     In  its  widest  economic  sense  labor  is  any  ex- 
ertion of  the  human  faculties  for  the  attainment  of  a  definite 
object.     This  definition  is  merely  an  extension  of  the  familiar 
one.     The  latter  includes  only  physical  exertion.      But  in 
economics  the  exercise  of  the  judgment  and  imagination  finds 
as  important  a  place  as  that  of  the  body.     Hence  the  mental 
occupations  of  the  lawyer,  the  author,  the  clergyman,  and  the 
actor  belong  to  the  same  class  as  the  bodily  exertions  of  the 
common  laborer.     They  are  equally  necessary  to  the  gratifica- 
tion of  the  general  desires  of  the  community. 

Although  no  harm  would  result  from  our  using  the  word 
labor  in  the  above  extended  sense,  yet  in  practice  we  limit  it 
as  follows :  Labor  is  exertion  of  the  human  faculties  devoted 
to  the  production  of  any  object  or  effort  for  which  other  per- 
sons than  the  laboi'er  are,  or  might  be,  willing  to  pay.  In 
familiar  language,  labor  is  all  that  any  one  does  in  order  to 
make  a  living. 

3.  Wealth.     In  economics  the  term  "wealth,  in  its  widest 
sense,  designates  all  those  things  which  men  gain  by  labor,  and 
employ  to  gratify  their  desires. 

Economists  have  sometimes  been  divided  on  the  question 
how  far  anything  not  material  could  be  considered  wealth,  and 
also  whether  the  term  should  be  confined  to  objects  the  use  of 
which  could  be  transferred  from  one  person  to  another.  It 
will  not  be  profitable  at  the  present  time  to  enter  into  a  dis- 
cussion of  this  question  further  than  to  say  that  it  seems  advan- 
tageous to  consider  the  word  in  its  more  extended  sense  ;  but, 
at  the  same  time,  to  confine  it  to  actual  objects  of  desire, 
material  or  immaterial,  transferable  or  not.  The  understand- 
ing of  the  definition  will  be  facilitated  by  enumerating  the 
principal  classes  of  objects  which  may  be  included  in  the 
term.  They  are : 

I.  All  the  lands  and  mines  of  the  country  to  which  labor 
has  been  applied  to  make  them  productive  of  edible  plants,  of 
animals,  or  of  minerals. 


II.  4]     OF  WEALTH  AND  ITS  ASSOCIATED  CONCEPTS.         49 

II.  The  improvements  in  and  upon  the  land   designed  to 
facilitate  production,  such  as  roads,  fences,  storehouses,  barns, 
etc. 

III.  All  appliances  which  men  have  made  for  the  manufac- 
ture, transportation,  preservation,  and  sale  of  the  products  of 
industry,  including  railways,  manufactories,  etc. 

IY.  The  houses  in  which  we  live,  together  with  the  furni- 
ture, pictures,  and  everything  else  which  they  contain  intended 
to  promote  our  ease  and  pleasure. 

Y.  All  products  undergoing  the  processes  of  manufacture, 
transportation,  and  sale  to  those  who  finally  use  them. 

YI.  Clothipg,  food,  books,  and  all  other  manufactured  pro- 
ducts in  possession  of  those  who  are  to  wear  or  use  them. 

YII.  The  skill,  business  ability,  or  knowledge  which  enable 
their  possessors  to  contribute  to  the  enjoyment  of  others,  includ- 
ing the  talents  of  the  actor,  the  ability  of  the  man  of  business, 
the  knowledge  of  the  lawyer,  and  the  skill  of  the  physician, 
are  to  be  considered  wealth  when  we  use  the  term  in  its  most 
extended  sense. 

If,  instead  of  discussing  the  definition  in  detail,  we  inquire 
what  is  the  understood  sense  in  which  the  word  is  used  in  eco- 
nomics, we  shall  find  the  definition  to  be  :  Wealth  is  that  for 
the  use  or  enjoyment  of  which  people  pay  money. 

4.  Of  Property  or  the  Right  to  or  Ownership  of  Wealth. 
It  is  necessary  in  every  branch  of  economics  to  bear  carefully  in 
mind  the  distinction  between  the  objects,  material  or  immate- 
rial, which  constitute  wealth,  and  the  ownership  of  or  rights  in 
those  objects,  which  secures  the  proper  party  in  the  enjoyment  of 
the  wealth.  In  many  cases  it  is  difficult  to  make  the  distinction, 
owing  to  the  very  general  or  abstract  nature  of  the  object  pos- 
sessed ;  but  its  importance  requires  a  very  careful  and  critical 
examination  on  the  part  of  the  student.  The  understanding  of 
the  subject  will  be  facilitated  by  taking  it  up  in  special  cases, 
beginning  with  the  most  familiar  ones,  before  wo  proceed  to 
any  generalization. 
4 


50  DESCRIPTION  OF  THE  SOCIAL  ORGANISM.        [II.  5. 

Here  is  a  suit  of  clothes.  That  suit  of  clothes  is  capable 
of  protecting  some  one  person  from  the  inclemency  of  the 
weather.  Since  it  can  protect  only  one  person  at  a  time,  it 
follows  that  there  must  be  some  law  or  general  understanding 
to  determine  a  person  having  an  exclusive  right  to  it.  The 
person  so  determined  is  called  the  owner  of  the  clothing ;  the 
clothing  is  called  his  property ;  he  has  the  sole  right  to  the 
use  and  enjoyment  of  the  clothing,  and  this  right  is  called 
ownership.  We  have  thus  four  words  all  of  which  are  rela- 
tive :  owner,  which  designates  the  person,  but  which  also  im- 
plies his  relation  to  the  clothing ;  property,  which  designates 
the  clothing  in  its  relation  to  the  owner ;  ownership,  which 
designates  the  relation  between  the  two ;  and  right,  which 
may  be  considered  as  giving  force  to  this  relation.  The  word 
wealth,  on  the  other  hand,  designates  the  object  absolutely ; 
that  is,  not  in  its  relations  to  any  particular  person.  So  far  as 
the  mere  object  is  concerned,  property  means  the  same  thing 
as  wealth  ;  it  differs  in  being  relative  to  some  owner. 

If  this  distinction  of  absolute  and  relative  terms  for  the 
same  object  offers  any  difficulty  to  the  student,  he  may  make 
the  subject  clear  by  considering  that  a  body  of  men  may  all  be 
brothers.  Hence  to  a  certain  extent  man  and  brother  may 
mean  the  same  thing.  The  difference  is  that  the  word  man 
is  an  absolute  term  designating  the  individual  just  as  he  stands, 
whereas  when  we  call  him  brother  we  imply  his  relation  to 
somebody  else,  either  a  sister  or  another  brother.  Of  the  same 
general  nature  is  the  difference  between  the  word  wealth, 
which  is  either  absolute,  or  relative  only  to  the  community  at 
large,  and  property,  which  considers  it  relative  to  the  owner. 

5.  Of  the  Owners  of  Property.  The  owner  of  property 
may  be  an  individual,  a  society,  or  an  indefinite  number  of  in- 
dividuals called  the  public,  whose  collective  personality  is  em- 
bodied in  a  conception  called  society,  the  government,  or  the 
state.  Any  individual  or  society  legally  capable  of  becoming 
an  owner  of  property  is  called  a  legal  person,  or  simply  a 


II.  5.]     OF  WEALTH  AND  ITS  ASSOCIATED  CONCEPTS.         51 

person.  Examples  of  such  persons  are  mercantile  firms, 
banking  and  railway  companies,  and  incorporated  societies,  as 
well  as  individuals  of  legal  age. 

Different  Forms  of  Ownership.  Considered  in  its  relation 
to  the  three  classes  of  owners,  property  may  be  divided  into 
public,  joint  or  corporate,  and  individual. 

Public  property  we  may  consider  to  be  owned  by  the  state, 
or  by  society  at  large.  The  roads  on  which  we  travel  in  the 
country,  the  streets  and  pavements  of  a  city,  the  fountains  and 
statues  which  ornament  it,  and  the  pipes  which  supply  it  with 
water,  are  examples  of  this  sort  of  property.  That  is,  all 
these  kinds  of  wealth  are  equally  possessed  and  enjoyed  by 
everybody  who  can  use  them. 

Joint  property  is  that  the  owner  of  which  is  any  definite 
body  of  persons.  When  this  body  is  specially  organized  by 
law  it  is  called  an  incorporated  company,  and  the  property  is 
called  corporate.  In  economics  we  have  no  occasion  for  any 
distinction  between  corporate  and  other  forms  of  joint  prop- 
erty. 

Individual  property  is  that  owned  by  an  individual.  Each 
member  of  an  association  has  an  indirect  or  secondary  right  in 
the  wealth  owned  by  the  association,  so  that  there  are  two 
distinct  orders  of  ownership.  An  example  of  this  is  afforded 
by  a  railway.  The  wealth  is  not  only  the  railway  itself, 
but  the  buildings,  engines,  cars,  and  other  appliances  neces- 
sary to  its  running.  The  owner  of  the  railway  as  a  whole 
is  a  body  of  men  called  a  railway  company.  Considered  in  its 
relation  to  this  owner,  the  property  in  the  railway  is  called 
stock,  and  the  stock  is  divided  up  into  small  parts  called 
shares*  The  shares  again  are  possessed  separately  by  the  in- 
dividual men  who  form  the  company,  each  man  owning  a  cer- 
tain number,  which  are  then  his  individual  property.  Here 
we  have  no  difficulty  in  distinguishing  between  the  stock  or 
shares,  which  make  up  the  several  properties  of  the  indi- 
vidual owners  and  the  wealth  consisting  of  the  railway  it- 
self and  the  various  appurtenances  connected  with  it,  which 


52  DESCRIPTION  OF  THE  SOCIAL  ORGANISM.         [II.  6. 

exists  independently  of  changes  in  the  ownership.  The  same 
principles  apply  to  manufacturing  and  commercial  companies. 
The  individual  ownership  of  wealth  is  subject  to  an  infinite 
variety  of  modifications.  In  economics  the  most  important 
modified  forms  are  credit  and  divided  ownership,  which  we 
shall  next  define. 

6.  Credit.  The  right  held  by  the  owner  of  credit  is  that 
of  requiring  from  some  other  person  or  owner  at  a  future  time 
the  payment  of  a  designated  sum  of  money.  The  holder  of 
the  right  is  called  the  creditor  •  the  person  against  whom  he 
holds  it,  the  debtor.  The  debtor,  whom  we  may  consider  as 
the  present  owner  of  the  money  to  be  paid,  may  be  any  kind 
of  legal  person,  an  individual,  a  company,  or  a  government. 
But  the  right  possessed  by  the  creditor  is  apparently  neither 
the  ownership  of  anything  which  comes  under  our  defini- 
tion of  wealth,  nor  that  of  any  material  object.  The  right  to 
demand  money  from  another  party  is  not  the  same  thing  as 
the  ownership  of  money.  Let  us  take  for  example  a  promis- 
sory note  by  which  the  drawer,  I),  is  under  an  obligation  to 
pay  the  holder,  A,  a  sum  of  money.  Now  although  ideally 
this  sum  of  money  is  a  certain  weight  of  gold  or  silver,  yet 
there  are  no  particular  pieces  of  gold  or  silver  which  con- 
stitute the  wealth.  It  may  very  well  happen  that  the  sum  of 
all  the  moneys  to  which  the  members  of  the  community  have 
rights  expressed  by  promissory  notes  exceeds  many  times  over 
the  money  which  actually  exists  in  the  community. 

The  difficulty  in  this  case  will  be  avoided,  and  the  case 
brought  under  our  general  definitions,  by  looking  at  another 
feature  of  the  case.  Every  right  of  this  class  is  accompanied 
by  a  corresponding  obligation  on  the  side  of  another  party ;  and 
the  right  and  obligation  are  mutual  and  equal  in  amount: 
where  one  ceases  the  other  ceases  also.  There  cannot  be  a 
creditor  without  a  debtor.  Now  the  most  accurate  way  to 
consider  the  subject  is  to  regard  the  right  possessed  by  the 
creditor  as  algebraically  positive  property,  and  the  equal 


II.  7.]    OF  WEALTH  AND  ITS  ASSOCIATED  CONCEPTS.         53 

obligation  on  the  part  of  the  debtor  as  algebraically  negative 
property.  The  sum  total  of  property  possessed  by  the  com- 
munity is  not  altered  by  one  member  owing  another ;  because 
equal  credits  and  debits  cancel  each  other,  just  as  positive  and 
negative  quantities  do  in  algebra  when  they  are  added. 

Thus,  if  D  is  indebted  to  C  in  the  sum  of  x  dollars,  we 
conceive  that  D's  ownership  does  not  extend  to  the  whole  of 
the  money  or  other  wealth  which  is  in  his  possession,  because 
such  ownership  is  diminished  x  dollars  by  the  debt.  If  w 
represents  the  whole  quantity  of  money  which  he  is  to  possess 
when  the  debt  becomes  due,  his  property  in  that  money  is 
w  —  x,  and  C's  property  is  x.  The  sum  of  these  properties 
makes  up  w,  the  quantity  of  money  in  question. 

7.  Divided  Property.  Credit  involves  a  special  kind  of 
divided  property.  But  there  are  modified  ownerships  of 
many  kinds,  of  which  the  following  is  the  most  important. 

A  person  may  have  a  right  of  property  in  an  estate,  not 
by  virtue  of  owning  any  part  or  share  of  it,  but  by  enjoying 
the  right  to  demand  from  its  owner,  no  matter  who  he  may  be, 
a  sum  of  money,  and  to  seize  the  estate,  or  require  its  sale,  in 
case  the  corresponding  obligation  on  the  part  of  the  owner  is 
not  fulfilled.  The  property  owned  in  this  case  is  in  the  nat- 
ure of  credit,  but  it  differs  from  the  credits  described  in  the 
last  article  in  that  the  property  inheres  in  a  particular  piece  of 
wealth,  namely,  the  estate  which  is  pledged  to  the  payment  of 
the  debt.  The  property  is  then  divided  between  the  two 
owners  as  follows :  if  x  be  the  total  value  of  the  estate,  and 
n  the  amount  of  the  debt  upon  it,  the  creditor's  share  will  be 
n  and  the  owner's  share  of  the  estate  will  be  x  —  n.  Both 
values  together  will  make  up  the  value  e  of  the  estate,  as  it 
should.  The  method  of  representing  the  property  algebrai- 
cally is  the  same  in  the  case  of  simple  credit. 

Debts  of  all  kinds  come  under  the  rule  that  they  are 
necessarily  offset  by  corresponding  obligations  on  the  part  of 
some  one,  and  therefore  form  no  part  of  the  total  property  of 


64  DESCRIPTION  OF  THE  SOCIAL  ORGANISM.         [II.  8. 

the  community.  In  the  case  of  government,  state  or  muni- 
cipal bonds  of  any  kind,  the  debtors  comprise  all  the  property- 
owners  in  the  community,  who  must  be  taxed  to  pay  the  debt, 
and  in  any  estimate  of  the  total  value  of  property  each  man's 
share  of  the  amount  due  should  be  subtracted  from  the  value 
of  his  individual  possessions.  The  result  of  the  correct  appli- 
cation of  all  these  principles  is  that  we  can  form  an  estimate 
of  the  total  value  of  all  the  wealth  of  the  country  which  shall 
be  quite  independent  of  the  particular  rights  of  property  in 
that  wealth. 

8.  Illustration  of  the  Difference  between  Wealth  and  Prop- 
erty. The  importance  of  keeping  in  mind  the  nature  of 
wealth,  irrespective  of  the  rights  of  property  in  it,  will  be  made 
clear  by  an  illustration.  In  the  year  1837  a  commercial  crisis 
unparalleled  in  its  intensity  swept  over  this  country :  failures 
in  business  were  seen  on  all  sides  ;  those  who  did  not  fail  had 
the  greatest  difficulty  in  making  good  their  debts ;  workmen 
were  thrown  out  of  employment,  and  a  large  majority  of  the 
people  felt  that  they  had  suddenly  become  poor.  In  ordinary 
language,  their  wealth  was  swept  away  as  by  a  hurricane,  and 
in  all  descriptions  of  the  crisis  it  was  alluded  to  as  a  destroyer 
of  wealth. 

And  yet  if  we  look  at  the  case  from  a  common-sense  point 
of  view  we  shall  see  that  no  wealth  at  all  was  destroyed. 
There  were  just  as  many  suits  of  clothes  in  the  country  the  day 
after  the  crisis  as  there  were  before,  and  they  were  just  as  well 
fitted  for  wearing.  The  mills  and  factories  were  all  in  as  good 
order,  the  farms  as  fertile,  and  the  crops  as  large  before  the 
supposed  hurricane  as  after.  The  houses  remained  standing, 
the  wood  was  in  the  woodsheds  ready  for  burning,  and  the 
food  in  the  larder  ready  for  cooking,  just  as  it  had  been  left. 
In  a  word,  every  appliance  for  the  continued  enjoyment  of  the 
fruits  of  labor  remained  as  perfect  as  it  ever  was.  It  is  true 
that  many  found  it  difficult  to  purchase  the  necessary  food  and 
clothing  although  it  existed  in  the  granary  and  shops.  But 


II.  11.]  OF  WEALTH  AND  ITS  ASSOCIATED  CONCEPTS.         55 

this  is  simply  saying  that  there  "was  a  difficulty  in  arranging 
the  terms  and  conditions  of  sales  between  the  owners  of  the 
food  and  clothing  apd  the  people  who  wanted  them.  "What 
the  change  in  the  state  of  things  really  consisted  in  cannot  be 
explained  until  we  have  reached  a  more  advanced  stage  of  the 
subject,  but  it  is  perfectly  clear  at  this  stage  that  it  did  not 
consist  of  any  destruction  of  wealth. 

9.  Transfer  of  Ownership.     In  most  cases  the  ownership 
of  property  can  be  transferred  by  some  simple  process  from 
one  person  to  another.     This  transfer  consists  in  one  person 
taking  the  place  of  another  in  that  right  to  the  wealth  which 
is  called  ownership.     It  is  made  in  various  ways.    In  the  famil- 
iar case  of  sale  of  personal  property,  the  first  owner,  called  the 
seller,  places  the  property  in  the  possession  of  the  second  one, 
called  the  purchaser.     In  case  where  the  purchaser  cannot  con- 
veniently take  possession  of  the  property  it  is  transferred  by 
an  instrument  in  writing  known  under  various  names  :  a  deed 
or  conveyance  when  the  property  transferred  is  real  estate ;  a 
bill  of  sale  when  it  is  personal  property ;  a  cheque  or  bill  of 
exchange  when  it  is  credit. 

10.  Commodity.    The  term  commodity,  in  economics, 
means  any  special  kind  or  collection  of  wealth.     It  is  usually 
confined  to  goods  for  sale  in  the  public  markets,  such  as  cloth- 
ing and  food,  and  in  general  to  particular  portions  of  wealth 
considered  in  their  relation  to  any  one  who  wants  to  possess 
and  enjoy  them. 

11.  Capital.     Capital  is  a  kind  of  wealth.      That  is,  all 
capital  is  wealth,  but  not  all  wealth  is  capital.     But  what  kinds 
of  wealth  shall  be  considered  capital  rind  what  not  is  a  ques- 
tion which  cannot  be  fully  understood  until  after  a  thorough 
study  of  the  subject.     It  will  suffice  at  present  to  say  that  capi- 
tal consists  of  all  that  wealth  which  the  owner  is  keeping,  not 
for  its  own  sake,  but  in  order  that  he  may  by  its  means  make 


56  DESCRIPTION  OF  THE  SOCIAL  ORGANISM.       [H.  11. 

it  the  instrument  of  acquiring  further  wealth.  For  example, 
tools  are  not  kept  because  they  satisfy  any  desire  of  the  owner, 
but  because  they  can  be  used  in  making  things  which  do  fulfil 
this  object.  Hence  they  are  capital.  The  term  also  includes 
machinery,  buildings  designed  for  manufacturing  purposes, 
and  the  raw  material  which  is  stored  away  in  order  to  be 
manufactured  into  articles  of  utility.  But  the  clothes  we  wear, 
the  food  we  have  stored  in  our  houses  for  eating,  and  the  beds 
on  which  we  sleep  are  not  capital,  because  they  are  kept  in 
order  to  be  immediately  useful. 

To  the  beginner  it  will  not  be  evident  why  this  distinction 
should  be  made  between  wealth  which  is  and  wealth  which  is 
not  capital,  but  we  shall  see  later  that  it  is  of  fundamental  im- 
portance in  questions  involving  the  interests  of  society. 

Note  on  the  Definition  of  the  Word  Property.  This  word  is  used  in  the 
present  chapter  in  its  popular  rather  than  in  its  strictly  legal  sense.  In  the 
latter  sense  such  words  as  "  property,"  "estate,"  and  "  farm  "  do  not  mean 
things,  but  rights.  An  estate  is  not  fields  and  buildings,  but  the  right  to  own- 
ership in  fields,  buildings,  or  other  wealth.  A  farm  does  not  mean  a  culti- 
vated piece  of  ground,  but  the  right  to  cultivate  the  ground  and  dispose  of  the 
crops.  So  property  is  not  wealth,  but  the  exclusive  right  to  the  possession 
of  wealth.  Whether  it  would  conduce  to  clear  thinking  in  economics  to 
confine  such  words  to  their  purely  legal  sense  is  a  question  well  worthy  of 
consideration.  Mr.  HENRY  DUNNING  McLEOD  in  his  Elements  of  Economies 
insists  very  strongly  on  the  legal  meaning  of  these  words,  and  considers  it 
a  positive  error  to  apply  them  to  things.  It  is  certain  that  in  the  case  in 
question  the  general  and  popular  meaning  of  the  words  referred  to  is  wealth, 
considered  not  in  itself,  but  in  relation  to  its  owner.  Since  this  relation 
necessarily  implies  the  right  of  the  owner  to  it,  the  two  ideas  of  right  and 
thing  in  which  the  right  inheres  are  inseparable.  It  does  not  therefore  seem 
that  any  confusion  will  arise  from  the  double  sense  in  which  the  word  is 
used.  When  one  transfers  property,  it  amounts  to  the  same  thing  whether 
we  say  that  what  he  transfers  is  the  right  or  the  thing.  On  the  other  hand, 
the  restriction  put  upon  the  definition  by  Mr.  McLeod  has  led  him  to  con- 
clude that  wealth  may  comprise  "abstract  rights,  quite  separate  and  sev- 
ered from  any  material  substances,"  which  does  not  sufficiently  distinguish 
the  right  from  the  thing. 


II.  13.]  OTHER  DEFINITIONS.  57 


CHAPTER  II. 

OTHER  DEFINITIONS. 

12.  Production.     The  act  or  process  of  applying  labor  in 
such  a  way  as  to  bring  wealth  into  existence  is  called  produc- 
tion. 

As  commonly  used  this  word  applies  only  to  changes  in  the 
raw  material  of  which  an  article  is  composed.  If  we  watch 
the  process  through  which  a  lump  of  iron  ore  is  changed  into  a 
keg  of  nails,  we  shall  find  the  material  smelted,  hammered,  put 
into  a  car,  conveyed  to  a  city,  and  passed  through  a  machine. 
All  these  operations  are  included  under  the  term  production. 
It  is  true  that  transportation  from  one  place  to  another  is  not, 
in  familiar  language,  called  production,  but  it  must  be  so  called 
in  scientific  nomenclature,  because  in  order  to  enjoy  an  article 
it  must  be  brought  within  our  reach,  and  the  act  of  so  bring- 
ing it  belongs  to  the  same  class  with  that  of  making  it. 

13.  Exchange.      In  the  most  general  sense  of  the  term 
exchange  consists  in  a  mutual  transfer  of  the  ownership  of 
two  properties.     A  transfers  to  B  his  (A's)  right  of  property  in 
some  commodity  in  consideration  of  B's  transfer  to  him  of 
some  other  and  equivalent  right. 

The  necessity  of  exchange  arises  from  the  circumstance  that 
no  one  person  can  produce  more  than  a  minute  fraction  of  the 
wealth  which  he  desires  to  enjoy.  When,  as  in  the  savage 
state,  each  individual  or  each  family  supplies  its  own  wants, 
there  can  be  no  considerable  enjoyment  of  wealth.  If  each 
man  among  us  should  attempt  to  make  boots,  clothing,  and 
hats,  to  build  houses,  to  paint  and  plaster  them,  and  to  furnish 
them  with  everything  necessary  for  comfort,  he  would  miser- 
ably fail.  But  when,  as  in  civilized  society,  each  person  de- 


58  DESCRIPTION  OF  TEE  SOCIAL  ORGANISM.       [II.  13. 

votes  himself  to  the  production  of  a  particular  kind  of  wealth, 
the  sura  total  of  wealth  produced  is  incalculably  greater  than 
when  each  person  tries  to  make  everything.  Now  in  order 
that  this  increased  production  of  each  kind  of  commodity  may 
be  enjoyed  by  others  than  its  immediate  producer,  there  must 
be  a  transfer  of  ownership  from  the  producer  to  the  persons 
who  are  to  enjoy  the  commodity.  Hence  arises  a  system  of 
mutual  exchange  in  which  each  receives  a  supposed  equiva- 
lent for  what  he  gives. 

Exchange  is  of  two  kinds,  barter  and  sale. 

Barter  is  the  exchange  of  one  commodity  for  another,  in 
the  case  when  each  party  receives  from  the  other  some  com- 
modity which  he  desires  to  make  use  of.  For  instance,  if  the 
owner  of  a  yoke  of  oxen  desires  to  exchange  them  for  a  horse, 
and  finds  a  person  who  having  a  horse  desires  a  yoke  of  oxen, 
the  exchange  of  ownership  would  be  barter. 

The  necessity  in  barter  that  each  party  shall  find  another  be- 
tween whom  and  himself  there  shall  be  a  mutual  desire  for  the 
exchange  of  commodities  renders  it  impracticable  on  any  con- 
siderable scale  in  a  developed  society.  Occasionally  we  hear 
of  a  man  bartering  a  horse  for  a  carriage,  or  a  farm  for  a  city 
residence,  but  the  transaction  is  too  rare  to  be  specially  consid- 
ered in  economics. 

In  all  societies  advanced  beyond  the  barbarous  state  exchange 
is  affected  by  the  use  of  a  metal  to  which  the  term  money  is 
applied.  The  exchange  of  a  commodity  for  money  is  called 
sale  in  relation  to  the  one  party  and  purchase  in  relation 
to  the  other.  To  illustrate  the  great  advantage  of  sale  over 
barter,  let  us  suppose  that  the  maker  of  a  pair  of  boots  desires 
to  exchange  them  for  a  hat.  It  would  be  necessary  for  him  to 
search  diligently  for  some  one  person  who  wanted  a  pair  of 
boots  and  who  had  a  spare  hat  to  exchange  for  them.  Perhaps 
he  could  find  no  such  person.  He  might  find  a  number  of 
owners  of  spare  hats  and  a  number  of  seekers  of  boots,  but 
unless  the  two  desires  to  part  with  the  hat  and  to  receive  a 
pair  of  boots  were  merged  in  one  person  his  search  would  be 


II.  14  ]  OTHER  DEFINITIONS.  69 

useless.  But  by  the  use  of  money  it  is  only  necessary  that  he 
should  first  find  some  one  who  desires  his  boots  and  then  some 
one  else  who  has  a  spare  hat,  and  by  sale  in  the  one  case  and 
purchase  in  the  other  the  desired  exchange  is  effected.  For 
this  reason  money  is  often  called  the  medium  of  ex- 
change. 

14.  Consumption.  It  is  a  universal  characteristic  of  wealth 
that  it  is  gradually  used  up  or  consumed  in  the  very  act  of  grati- 
fying the  desires  of  its  owners.  The  gradual  wearing  out  of  a 
coat  and  its  consequent  reduction  to  the  state  of  rags  is  typical 
of  this  process  in  its  ultimate  form.  The  length  of  time  occu- 
pied by  wealth  in  the  processes  of  consumption  is,  however, 
very  different  with  different  kinds  of  wealth.  The  words  and 
gestures  of  the  actor  are  consumed  at  the  moment,  and  die  in 

O  •  * 

the  very  act  of  pleasing  his  audience.  The  faculties  and  skill 
of  men  die  away  in  old  age  and  entirely  disappear  at  death. 
Clothing  is  consumed  in  a  few  months  or  years  according  to 
circumstances.  In  the  case  of  houses  a  continual  process  of 
consumption  is  going  on  through  the  decay  and  disintegration 
of  material  produced  by  time  and  the  weather.  But  for  many 
years  and  even  centuries  this  consumption  may  be  neutralized 
by  new  acts  of  production  in  the  form  of  repairs  to  the  house. 
Ships  and  machinery  wear  out  in  the  course  of  a  few  years.  A 
canal  so  far  as  we  know  may  be  preserved  through  indefinite 
periods  with  the  aid  of  occasional  repairs.  Without  this  it  will 
in  the  course  of  time  be  effaced  through  the  operations  of 
nature.  This  wearing  out  of  wealth  is  called  consumption. 
Productive  and  Unproductive  Consumption.  In  the  case 
of  houses,  furniture,  clothing,  food,  and  other  articles  the  com- 
modity is  gradually  consumed  in  the  very  act  of  gratifying  the 
consumer,  and  eventually  disappears  as  wealth.  The  house 
after  decaying,  the  coat  after  being  worn  out,  and  the  food 
after  being  eaten  no  longer  have  the  properties  of  house, 
clothing,  or  food.  This  process  of  losing  useful  properties 
is  called  unproductive  consumption.  But  in  the  process  of 


60  DESCRIPTION  OF  THE  SOCIAL  ORGANISM.       [II.  14. 

manufacture  wealth  is  continually  being  consumed  for  the  pur- 
pose of  reappearing  in  a  new  and  more  useful  form.  For 
example,  the  wool  of  the  sheep  disappears  as  wool  when  it 
is  woven  into  cloth.  The  cloth  can  no  longer  be  used  or  sold 
as  cloth  after  it  is  made  into  a  coat.  We  conceive  in  these 
cases  that  the  wool  and  cloth  are  really  consumed  to  reappear 
in  the  improved  forms  of  cloth  and  a  coat  respectively.  This 
disappearance  to  reappear  in  a  new  form  is  called  productive 
consumption. 

The  question  may  be  asked,  Since  the  material  of  the  wool 
remains  through  the  whole  process,  and  actually  exists  in  the 
coat,  why  talk  of  consumption  at  all  ?  We  answer  this  ques- 
tion by  viewing  the  case  in  other  aspects.  Consumption  does 
not  consist  in  the  annihilation  of  matter,  for  if  it  did  there 
would  be  no  consumption  at  all.  The  ultimate  molecules  of 
matter  do  not  admit  of  change  or  decay.  Consumption  con- 
sists only  in  a  change  of  the  form  and  relations  of  the  mole- 
cules. Nearly  all  the  cotton  that  went  into  your  shirt  is  still 
there  after  the  shirt  is  a  pile  of  rngs  in  the  paper-mill.  In  no 
case,  therefore,  is  consumption  anything  but  a  change  in  the 
form  of  matter.  We  therefore  say,  in  economics,  that  any 
particular  kind  of  material  is  consumed  when  its  form  is  so 
changed  that  it  loses  its  original  properties  or  qualities.  Now, 
after  the  wool  is  made  into  cloth  it  has  lost  the  property  of 
being  conveniently  carded  and  spun  and  is  no  longer  available 
for  many  purposes  to  which  it  could  originally  have  been  put. 
It  is  therefore  consumed.  So,  also,  the  cloth  after  being  made 
into  a  coat  is  good  for  nothing  except  as  a  coat ;  it  can  no  longer 
be  used  as  blanket  or  made  into  a  pair  of  pantaloons.  We 
therefore  say  that  it  is  consumed.  But  because  in  the  act  of 
consumption  a  more  useful  form  of  wealth  has  been  produced 
we  call  the  consumption  productive. 

In  order  that  consumption  may  be  productive  it  is  not  nec- 
essary that  the  identical  wealth  consumed  should  be  repro- 
duced in  the  new  form.  The  consumption  of  oats  and  hay  by 
a  horse  may  be  productive.  The  new  form  of  oats  and  hay 


II.  15.]  OTHER  DEFINITIONS.  61 

will  be  whatever  wealth  the  horse  may  be  enabled  to  produce. 
If  he  takes  wheat  to  the  mill  to  be  ground,  the  food  he  has 
eaten  may  be  considered  as  reappearing  in  the  form  of  flour. 
The  consumption  of  the  iron  and  brass  which  enter  into  the 
machinery  of  a  cotton-mill  results  in  the  formation  of  cloth,  and 
not  in  any  new  form  of  the  metals  which  went  into  the  ma- 
chinery. 

The  distinction  between  the  two  kinds  of  consumption  may 
be  condensed  as  follows :  Wealth  being  necessarily  consumed 
in  the  process  of  satisfying  the  wants  of  man,  we  say : 

If  the  owner  of  wealth  is  consuming  it,  or  allowing  it  to  be 
consumed,  not  for  his  own  immediate  satisfaction,  but  in  order 
that  he  may  sell  the  result  of  the  consumption  to  others,  then 
the  consumption  is  productive. 

But  if  he  is  consuming  it  for  his  own  satisfaction  or  that  of 
his  family  or  friends,  the  consumption  is  unproductive. 

15.  We  perceive  that  the  object  and  result  of  the  opera- 
tions we  have  described  is  that  men  may  enjoy  wealth.  These 
various  operations  may  be  divided  into  three  classes — -produc- 
tion, transportation,  and  exchange.  The  first  consists  in  me- 
chanical operations  upon  the  sheep,  the  wool,  the  yarn,  and  the 
cloth,  which  operations  were  performed  by  labor  with  the  aid 
of  capital,  and  are  called  tending,  shearing,  combing,  spinning, 
weaving,  cutting,  making  up,  etc.  Since  each  of  these  opera- 
tions adds  to  the  value  of  the  product,  they  are  all  productive. 

The  earlier  economists  were  divided  over  the  question 
whether  transportation  should  also  be  included  in  the  same 
class  as  production.  It  is,  however,  obvious  that  the  transpor- 
tation was  just  as  necessary  a  condition  of  the  coat  being  worn 
as  anything  else ;  it  should  therefore  also  be  considered  as  pro- 
duction. But  exchange  has  always  been  considered  separate 
from  production.  Yet  so  far  as  the  mere  operation  is  concerned, 
the  process  of  exchange  is  just  as  necessary  to  our  having  the 
coat  as  any  other  process  was.  It  involved  a  certain  amount  of 
labor,  namely,  the  labor  of  building  a  warehouse  to  hold  the 


62  DESCRIPTION  OF  THE  SOCIAL  ORGANISM.       [II.  16. 

cloth  or  the  coat  until  we  should  want  it,  and  the  labor  of  tak- 
ing care  of  it  during  this  interval,  as  well  as  that  of  doing  it  up 
in  proper  shape  and  receiving  the  money  paid  for  it.  It  is 
convenient  to  have  a  separate  term  for  this  necessary  labor  in- 
volved in  the  mere  operation  of  exchange.  We  shall  therefore 
call  it  friction  of  exchange. 

The  operation  of  exchange,  however,  involves  something 
more  than  the  mere  performance  of  labor,  namely,  the  use  of 
money  and  credit.  Money  and  credit  may  be  considered  as 
forming  a  certain  mechanism  by  which  exchange  is  effected  ; 
they  have  therefore  been  treated  under  the  head  of  the  me- 
chanism of  exchange.  This  mechanism  involves  other  forces 
than  friction.  Being  one  of  the  essentials  to  our  enjoying  the 
coat,  it  is  an  element  in  the  social  organism  of  the  same  impor- 
tance with  capital  and  labor. 

16.  Value.  "We  can  readily  understand  that  under  a  sys- 
tem of  barter  the  question  would  continually  arise  how  much 
of  one  commodity  should  be  given  in  exchange  for  another.  If 
a  man  with  a  pair  of  boots  to  barter  found  one  person  offering 
him  a  hat  in  exchange,  a  second  a  coat,  and  a  third  a  barrel  of 
flour,  he  would  have  no  ready  means  of  deciding  which  offer 
was  the  best,  or  whether  any  of  them  would  be  advantageous. 
But  when  a  commodity  is  sold,  the  owner  receives  a  definite 
amount  of  money  in  exchange  for  it,  and  the  best  sale  is  that  for 
most  money.  In  effecting  the  sale  he  has  before  him  a  definite 
object,  namely,  to  get  as  much  money  in  exchange  as  he  can. 
The  buyer  has  before  him  another  definite  object — to  get  the 
commodity  as  cheaply  as  he  can.  Thus,  in  each  case,  a  certain 
order  of  choice  is  presented,  the  highest  amount  of  money  in 
the  case  of  the  seller,  and  the  largest  amount  of  goods  in  the 
case  of  the  buyer,  being  preferred.  From  this  order  of  prefer- 
ence arises  the  conception  of  a  mathematical  quantity  called 
value. 

It  is  a  general  rule,  applicable  not  only  to  economics,  but  to 
all  the  mathematical  sciences,  that  the  definition  of  an  object 


1L  17.]  OTHER  DEFINITIONS.  63 

or  of  a  magnitude  of  any  kind  does  not  include  a  description 
of  how  it  shall  be  measured.  As  a  general  rule  the  quantity 
itself  and  the  system  of  measuring  it  are  to  be  defined  sepa- 
rately. Now  what  is  termed  the  theory  of  value  includes  not 
only  these  two  definitions,  but  at  least  a  third  subject.  "We 
thus  have, 

First,  the  definition  of  value  as  a  simple  quality  or  object, 
without  respect  to  how  it  shall  be  measured.  That  is,  we  must 
know  what  value  is. 

Secondly,  we  have  to  describe  or  define  how  value  shall  be 
measured. 

Thirdly,  we  have  to  study  all  the  causes  on  which  -value  de- 
pends. 

The  last  does  not  belong  to  the  present  stage  of  the  subject, 
and  the  first  can  be  better  considered  at  a  future  stage.  "We 
have  therefore  only  to  deal  -with  the  second  by  considering 
how  value  is  measured  in  practice. 

17.  Value  as  a  Mathematical  Quantity.  In  economics 
price  is  considered  as  the  measure  of  value.  The  price  of  a  com- 
modity is  the  number  of  units  of  money  which  the  commodity 
can  be  exchanged  for  in  the  public  market.  The  monetary 
unit  is  a  dollar  in  America,  a  pound  in  England,  a  franc  in 
France,  a  mark  in  Germany,  etc. 

"We  are  careful  to  say,  not  that  price  is  value,  but  that  price 
is  the  measure  of  value.  It  is  the  measure  of  value  just  as 
length  is  the  measure  of  a  line,  weight  the  measure  of  iron  in 
the  market,  and  volume  the  measure  of  things  which  sell  by 
the  bushel.  "We  have  now  to  consider  the  method  of  measure- 
ment. 

I.  In  mathematics  quantity  of  any  kind  is  measured  by 
taking  a  certain  standard  portion  of  the  quantity  as  a  unit  and 
determining  to  how  many  of  these  units  the  quantity  measured 
is  equivalent.  For  instance,  the  length  of  a  board  may  be  ex- 
pressed by  taking  a  standard  unit  called  the  foot,  and  stating 
how  many  feet  will  make  a  length  equal  to  the  board. 


64  DESCRIPTION  OF  THE  SOCIAL  ORGANISM.       [II.  17. 

II.  When  we  measure  a  quantity  we  leave  out  of  considera- 
tion all  the  qualities  of  the  thing  measured  except  those  which 
pertain  to  the  special  quality  which  is  measured.  For  exam- 
ple, in  estimating  length  the  measuring  unit  may  be  made  of 
iron,  boxwood,  brass,  or  any  other  material.  The  thing 
measured  may  be  wood,  iron,  rope,  or  any  other  substance ; 
may  be  of  any  color  and  have  any  weight.  But  all  such  quali- 
ties as  color,  weight,  etc.,  are  left  out  of  consideration  in  the 
estimate  of  length.  So  with  weight.  Our  unit  of  weight, 
which  may  be  a  pound  or  a  kilogram,  may  be  of  any  mate- 
rial whatever ;  and  the  thing  weighed  may  be  of  any  length, 
any  color,  or  any  substance.  But  in  stating 'the  weight  we 
make  abstraction  of  all  qualities  except  weight. 

So  with  value.  In  stating  the  value  of  a  commodity  we 
have  no  reference  to  its  color,  magnitude,  or  weight,  but  only 
to  the  degree  in  which  it  possesses  the  attribute  of  command- 
ing money  in  the  public  market.  Just  as  we  have  a  certain 
measure  called  a  foot  which  we  take  as  the  unit  of  length,  or 
a  certain  weight  called  a  pound  as  a  unit  of  weight,  so  we  have 
a  piece  of  gold  which  we  call  a  dollar,  the  value  of  which  we 
take  as  the  unit  of  value.  Again,  as  we  measure  length  by 
applying  a  foot-rule,  and  weight  by  balancing  two  things  in 
the  scales,  so  we  measure  any  commodity  in  terms  of  the  unit 
of  value  by  ascertaining  how  many  units  of  value  it  will  ex- 
change for  in  the  public  market. 

Relativity  of  Value.  It  follows  from  this  that,  like  all 
other  expressions  of  quantity,  values  are  not  absolute,  but  rela- 
tive to  some  unit  of  value.  If  we  are  asked  for  the  value  of 
a  loaf  of  bread,  we  can  answer  only  by  saying  that  it  is  equal 
to  a  certain  number  of  cents.  The  value  of  one  cent  is  then 
the  term  of  comparison  or  the  unit  of  measure.  If  we  express 
the  value  of  a  house  in  dollars,  the  dollar  is  the  term  of  com- 
parison or  unit  of  value. 

Absolute  Value.  It  does  not  follow  from  this  that  there  is 
no  such  thing  as  absolute  value,  but  only  that  we  have  no  way 
of  stating  what  the  absolute  value  of  anything  is.  Here  again 


II.  17.]  OTHER  DEFINITIONS.  65 

our  conceptions  will  be  assisted  by  an  analogy  with  sensible 
objects.  We  have  here  a  piece  of  rope.  It  has  a  certain 
length.  I  may  inform  you  what  that  length  is  by  telling  you 
that  it  is  2  yards,  6  feet,  or  180  centimetres.  Then  the  yard, 
the  foot,  or  the  centimetre  is  the  term  of  comparison.  Yet 
when  I  think  about  the  rope,  I  conceive  its  length  as  remain- 
ing the  same  no  matter  which  term  of  comparison  we  use.  So 
with  value.  The  value  of  a  barrel  of  flour  to  a  certain  person 
under  given  conditions  is  the  same,  though  \ve  may  call  it  one 
pound,  five  dollars,  twenty  marks,  or  twenty-five  francs. 

Effect  of  Changing  the  Unit  of  Measure.  This  principle 
has  an  important  application.  The  number  which  expresses 
value,  that  is,  the  price,  depends  upon  the  unit  of  comparison, 
and  in  fact  varies  inversely  as  that  unit  varies.  For  example  : 
A  barrel  of  flour  is  worth  four  times  as  many  marks  as  dol- 
lars, because  the  mark  is  only  worth  one  fourth  as  much  as 
the  dollar.  Now  if  all  the  foot-measnros  of  the  country  were 
liable  to  change,  either  by  an  act  of  Congress  or  by  a  natural 
shrinkage  or  expansion  over  which  men  had  no  control,  it  is 
evident  that  the  expression  for  all  lengths  would  vary  inversely 
as  the  measures.  If  the  yard-stick  were  reduced  to  one  half, 
a  piece  of  cloth,  unchanged  in  absolute  length,  would  measure 
twice  as  many  yards.  So,  in  the  case  of  value,  we  are  com- 
pelled to  admit  that  our  measuring  unit,  the  dollar,  is  subject 
to  changes  like  changes  of  length  in  a  yard-stick.  The  prices 
of  commodities  will  then  change  in  the  inverse  ratio.  But  we 
are  not  therefore  to  look  upon  their  absolute  values  as  being 
altered  by  this  cause,  though  their  value  relatively  to  the  dol- 
lar is  altered.  The  consideration  of  these  changes  belongs  to 
;i  later  part  of  the  subject ;  what  we  have  at  present  to  do  is  to 
fix  in  the  mind  the  measure  of  value  as  a  mathematical  quan- 
tity, namely : 

The  value  of  a  commodity  is  expressed  by  the  number  of 
monetary  units  it  witt  exchange  for  in  the  public  market. 

5 


66  DESCRIPTION  OF  THE  SOCIAL  ORGANISM. 


NOTES  AND  EXERCISES. 

1.  The  business  forms  and  evidences  of  credit  belong  rather  to  the  subject 
of  business  and  finance  than  to  that  of  economics;  but  as  a  knowledge  of 
them  is  essential  to  the  study  of  the  latter  science,  the  following  explana- 
tions may  be  of  use  to  the  student. 

We  call  to  mind  that  credit,  as  already  explained,  means  the  right  on  the 
part  of  the  creditor  to  require  a  payment  of  money  at  some  future  time, 
and  of  course  implies  a  corresponding  obligation  on  the  part  of  the  debtor. 
The  written  or  printed  instruments  by  which  such  obligations  are  certified 
are  classified  in  various  ways,  depending  upon  the  class  of  persons  to 
which  the  creditor  belongs,  and  upon  the  nature  of  his  obligation. 

The  legal  obligation  on  the  part  of  an  individual  or  a  firm  to  make  a 
payment  is  certified  by  i\  promissory  note.  Such  a  note  is  commonly  ex- 
pressed in  the  following  form: 

NEW  YORK,  December  1, 1885. 

Six  months  after  date  I  promise  to  pay  to  John  Smith  or  order  the  sum  of 
$700,  with  interest  from  date,  for  value  received. 

WILLIAM  S.  BARTLETT. 
i 

The  expression  "for  value  received"  is  necessary  because  payment  can- 
not be  enforced  at  law  unless  the  promise  was  made  in  consideration  of 
some  act  performed  by  the  other  party. 

The  term  "or  order"  indicates  that  the  drawee  or  creditor  (Smith)  may 
transfer  his  right,  by  indorsement  on  the  note,  to  any  other  person,  this 
person  to  another,  and  so  on  indefinitely.  The  transfer  is  effected  by  each 
holder  writing  on  the  back  of  the  note  an  order  to  pay  some  other  holder 
and  signing  it,  which  order  is  called  an  indorsement. 

When  the  debt  is  due  from  an  incorporated  company  or  a  government, 
the  evidence  of  obligation  is  called  a  bond.  The  principal  difference  be- 
tween bonds  and  promissory  notes  consists  in  the  persons  who  issue 
them,  and  in  the  fact  that  in  a  bond  is  commonly  given  a  statement  of  the 
laws  or  other  authority  under  which  it  is  issued.  .Sometimes,  as  in  the  case 
cf  United  States  bonds,  the  principal  of  the  debt  is  payable  at  a  future  defi- 
nite time,  with  interest  payable  semi-annually.  In  the  case  of  bonds  issued 
by  most  European  governments,  the  time  of  payment  of  the  principal  is  so 
far  from  being  definitely  fixed  that  the  value  of  the  bonds  depends  mainly 
upon  the  rate  of  interest,  and  the  obligation  is  that  of  paying  a  certain  sum 
annually  for  an  undefined  period  of  time. 

Next  to  government  bonds,  railway  bonds  have  become  the  most  common 
in  recent  times.  When  a  railway  is  to  be  built,  the  stockholders  generally 
borrow  a  considerable  part  of  the  money  necessary  for  the  work.  The 
bonds  in  which  the  obligation  to  pay  principal  and  interest  of  the  money  is 
certified  are  called  railway  bonds. 


EXERCISES.  67 

Mortgages.  The  conditional  right  to  property  pledged  in  payment  of  a 
debt,  which  has  been  described  in  §  7,  is  called  a  mortgage.  Railway 
bonds  are  always  secured  by  a  mortgage  upon  the  property  held  by  the 
railway  company.  Then,  in  case  the  company  fails  to  make  good  its  obli- 
gations, the  bond-holders  have  the  right  to  take  possession  of  all  the  prop- 
erty owned  by  the  railway  company,  and  to  apply  it  in  paying  their  bonds 
or  otherwise  securing  their  rights.  The  familiar  case  of  a  mortgage  of  real 
or  personal  property  by  an  individual  may  also  be  mentioned,  but  need 
not  be  discussed. 

2.  Mr.  II.  D.  MacLeod  divides  wealth  into  three  classes,  as  follows  : 

I.  "Material  or  corporeal  tilings.    There  are  material  things,  such  as 
lands,  houses,  money,  corn,  timber,  cattle  and  herds  of  all  sorts,  jewelry, 
minerals,  and  innumerable  things  of  this  nature  which  can  be  bought  and 
sold,  and  whose  value  is  measured  in  money. 

II.  "  Immaterial  wealth.     A  person  may  sell  his  labor  or  services  in  many 
capacities  for  money,  such  as  a  ploughman,  an  artisan,  a  carpenter,  or  as  a 
physician,  an  advocate,  an  engineer,  an  actor,  or  a  soldier;  and  when  he 
receives  a  definite  sum  of  money  for  such  labor  or  service,  its  value  is 
measured  in  money,  as  precisely  as  if  it  were  a  material  chattel. 

"We  have  already  cited;  in  a  previous  chapter,  the  dialogue  called  the 
Eryxias,  to  show  that  labor  of  any  sort  which  is  paid  for  is  wealth,  for  the 
very  same  reason  that  gold  and  silver  are  wealth. 

III.  ' '  Incorporeal  wealth.    There  are  vast  masses  of  property  which  exist 
only  in  the  form  of  abstract  rights,  quite  separate  and  severed  from  any 
material  substances,  which  can  all  be  bought  and  sold,  and  whose  value 
can  be  measured  in  money,  exactly  like  that  of  any  material  chattel." 

Is  the  above  classification  satisfactory?  In  the  second  class  can  labor 
be  properly  considered  as  wealth?  Must  not  something,  if  it  be  no  more 
material  or  durable  than  musical  sounds,  be  produced  by  the  labor?  If  so, 
in  what  does  the  wealth  inhere?  Is  labor,  apart  from  a  result,  ever  paid  for? 

In  respect  to  the  third  class,  can  any  abstract  rights  have  market  value 
unless  they  are  rights  to  or  in  some  object,  now  existing  or  hereafter  to 
exist,  material  or  immaterial?  Consider  in  succession  the  case  of  govern- 
ment bonds,  railway  stocks  and  bonds,  bank  stocks,  promissory  notes,  and 
tickets  to  a  theatre.  Can  you,  in  all  these  cases,  form  distinct  conceptions 
of  the  right,  and  of  the  object  in  which  it  inheres?  If  so,  you  are  to  con- 
sider the  latter,  whatever  it  may  be,  as  the  wealth,  and  the  former  as 
nothing  more  than  the  right  to  the  wealth. 

8.  To  what  extent,  if  at  all,  do  you  think  any  of  the  following  things 
should  be  considered  wealth?  Give  your  reasons  in  each  case,  but  remem- 
ber at  the  same  time  that  since  we  are  concerned  only  with  definitions,  and 
since  definitions,  in  the  last  analysis,  arc  arbitrary,  we  are  to  consider  only 
the  question  whether  it  is  convenient  and  conducive  to  clear  thinking  to 
consider  the  things  as  wealth. 


68  DESCRIPTION  OF  THE  SOCIAL  ORGANISM. 

I.  The  acquired  skill  of  the  artisan. 
II.  A  strong  and  active  population. 

III.  The  moral  qualities  of  tbe  people. 

IV.  The  sounds  produced  by  a  musician. 

V.  The  Washington  monument  at  Washington. 
VI.  A  good  business  reputation. 

4.  What  persons  can  be  said  to  enjoy  or  use  the  Washington  monument? 

5.  A  farmer  owns  a  farm  valued  at  $10,000.     A  railway  company  of 
which  the  stock  is  divided  into  50,000  shares  has  a  mortgage  of  $6000  on 
the  farm.     If  the  company  consists  of  1000  shareholders,  each  holding  50 
shares  of  the  stock,  how  is  the  property  in  the  farm  divided  amongst  the 
various  parties  concerned? 

6.  The  net  earnings  of  a  railway  having  10,000  shares  of  stock  arc  such 
as  to  justify  a  gross  valuation  of  $2,000,000.     It  has  out,  however,  1500 
mortgage  bonds  of  $1000  each.     What  will  be  the  value  of  the  following 
properties  in  the  railway  and  its  bonds  held  by  the  following  three  per- 
sons? 

A.  A  person  holding  50  shares  of  the  stock. 

B.  A  person  holding  60  shares  of  the  stock  and  5  of  the  bonds. 

C.  A  person  holding  10  shares  of  the  stock  and  20  of  the  bonds. 

7.  If  the  inhabitants  of  a  city  should  borrow  a  sum  of  $5000  and  expend 
it  in  improving  their  streets,  in  what  respect  would  the  amount  of  public 
and  private  property  of  the  city  and  its  inhabitants  be  changed  after  the 
improvement  was  made?    Consider  separately  the  cases  when  the  money 
is  borrowed  from  persons  outside  the  city  and  when  the  citizens  themselves 
loan  the  money. 

8.  A  farmer  borrows  $1000  from  his  neighbor,  and  expends  it  in  barns 
and  other  improvements  on  his  farm.     In  what  respect  has  the  wealth 
owned  by  the  farmer  and  his  neighbor  respectively  been  changed?    Has 
the  total  value  possessed  by  either  been  changed? 

9.  If  all  the  members  of  a  community  should  lose  all  their  money,  but 
still  have  an  ample  supply  of  all  the  necessaries  and  luxuries  of  life  stored 
up  in  their  warehouses,  would  they  be  completely  impoverished  by  the 
loss  of  their  money?    In  what  way  would  you  expect  them  to  proceed  in 
order  to  make  use  of  their  wealth? 

10.  If,  in  levying  a  tax,  every  holder  of  a  promissory  note  secured  by 
mortgage  of  farms  is  taxed  upon  the  whole  amount  of  the  note,  while  the 
owners  of  the  farms  are  taxed  for  the  full  value  of  the  farms,  is  there  any 
inequality  or  injustice  in  the  tax? 

11.  When  we  say  of  a  rich  man  "he  has  plenty  of  money,"  or  "he  owns 
a  million  of  dollars,"  do  we  make  a  correct  use  of  language?    Do  you  con- 
ceive that  there  is  any  person  in  the  country  who  now  owns,  or  ever  did 


EXERCISES.  (59 

own,  a  million  of  dollars  in  either  gold  or  silver?    Define  precisely  what  it 
is  we  mean  when  we  speak  of  a  rich  man  as  owning  money. 

12.  Can  any  person  but  the  owner  of  a  private  collection  of  pictures 
enjoy  the  use  of  the  pictures?    Can  he  enjoy  them  equally  with  the  owner? 

13.  When  a  hospitable  man  gives  an  expensive  dinner  -  party  to  his 
friends,  describe  the  compensation  which  he  receives  for  the  expenditure 
of  his  money. 

14.  From  an  economic  point  of  view,  what  does  the  contributor  to  a 
charitable  society  receive  in  exchange  for  his  gifts? 

15.  Do  you  consider  that  in  either  of  the  last  two  cases  there  are  any 
sound  reasons  for  making  a  distinction  between  the  enjoyment  received  for 
the  expenditure  and  the  enjoyment  received  when  one  purchases  goods  in 
the  market? 

16.  Do  you  consider  that  the  country  at  large  is  richer  or  poorer  when, 
in  consequence  of  a  scarcity  in  the  wheat-crop,  the  price  of  wheat  rises  in 
a  yet  greater  proportion,  so  that  the  crop  is  worth  more  than  before? 

17.  Suppose  Congress  should  call  in  all  the  silver  and  gold  of  the  country 
and  re-coin  it,  putting  just  half  as  much  metal  in  the  coin  as  before,  so  that 
twice  as  many  dollars  would  be  in  circulation,  but  each  dollar  would  only 
have  half  as  much  metal.     Can  you  judge  what  effect  this  measure  would 
have  upon  price?    Do  you  conceive  that  values  would  be  affected  by  it? 
If  so,  how,  or  in  what  sense? 

18.  When  one  buys  a  ticket  to  the  theatre,  what  is  to  be  regarded  as  the 
wealth  he  is  paying  for? 

19.  During  the  few  years  after  the  gold  discoveries  in  California  and 
Australia,  prices  generally  were  higher  the  world  over.     Did  this  indicate 
a  change  in  real  values,  and,  if  so,  in  the  value  of  what? 

20.  When  we  speak  of  the  value  of  a  good  name,  do  we  use  the  word 
"value"  in  an  economic  sense?     Supposing   it  to  be  interpreted  in  an 
economic  sense,  how  would  you  measure  it? 

21.  Are  the  following  cases  of  consumption  productive  or  unproductive? 
I.  The  consumption  of  wheat  to  produce  flour. 

II.  The  consumption  of  flour  to  make  bread. 

III.  The  consumption  of  bread  to  support  life. 

IV.  The  burning  of  coal  in  an  engine. 

V.  The  burning  of  coal  to  warm  a  house. 
VI.  The  burning  of  coal  to  warm  a  factory. 

22.  What  would  the  economist  mean  by  the  consumption  of  horses  and 
cattle?    In  what  cases  is  the  consumption  productive,  and  in  what  cases 
unproductive? 

23.  What  different  kinds  of  wealth  have  to  be  consumed  in  the  produc- 
tion of  wheat?    In  that  of  wealth? 


70  DESCRIPTION  OF  THE  SOCIAL  ORGANISM.       [II.  18. 


DIVISION  B.— THE  MECHANISM  OF  PEODUCTION. 


CHAPTER  III. 

THE  REQUISITES  OF  PRODUCTION. 

18.  To  see  what  we  mean  by  the  requisites  of  production, 
let  us  return  to  our  starting-point.  We  see  in  man  a  being 
moved  to  action  by  innumerable  wants.  The  satisfaction  of 
these  wants  constitutes  his  well-being,  and  the  exertions  which 
he  makes  to  attain  this  well-being  are  called  his  labor.  The  pro- 
cess of  employing  his  labor  so  as  to  produce  the  greatest  well- 
being  requires  certain  agencies  which  are  included  under  the 
term  wealth.  The  operation  of  bringing  wealth  into  existence 
and  making  it  available  for  well-being  is  called  production. 
Now  if  men  could  at  any  moment  produce  all  the  wealth  they 
wanted  without  regard  to  conditions,  the  state  of  the  world 
would  be  entirely  different  from  what  it  is.  As  a  matter  of 
fact,  the  successful  production  of  wealth  requires  the  employ- 
ment of  objects  and  agencies  of  various  kinds.  Any  object  or 
agency  which  conduces  to  production  is  called  a  requisite  of 
production.  To  illustrate  the  requisites  of  production,  let  us  see 
what  had  to  be  done  in  order  that  a  coat  should  be  made  for  a 
man  to  wear. 

In  the  first  place,  sheep  had  to  be  reared,  pastured,  and  sheared 
in  order  that  the  wool  necessary  for  the  coat  should  be  ob- 
tained. The  breeding  of  the  sheep  required  a  considerable 
expanse  of  land  on  some  western  prairie  or  in  the  interior  of 
Australia.  It  is  obvious  that  without  land  there  could  be  no 
grass  and  therefore  no  wool.  Now  land  is  in  its  original  state  a 
gift  of  nature  which  men  cannot  make  at  all.  In  the  further  pro- 


11.18.]  THE  REQUISITES  OF  PRODUCTION.  71 

cess  of  manufacture  a  factory  bad  to  be  erected  and  machinery 
of  brass  and  iron  employed.  A  particular  kind  of  eartb  was 
necessary  to  make  tbe  bricks  out  of  wbicb  tbe  factory  was 
built,  and  tbe  iron  bad  to  be  extracted  from  iron  ore.  Botb 
tbese  materials  bad  to  be  taken  out  of  tbe  eartb,  and  tbeir  own- 
ersbip  is  associated  witli  tbat  of  land.  If  tbe  macbinery  was 
run  by  water-power,  a  river  was  necessary  ;  if  by  steam-power, 
coal  bad  to  be  dug  from  tbe  eartb  to  make  tbe  fires  wbicb  pro- 
duced tbe  steam. 

If  we  take  up  any  otber  article  of  wealtb  and  inquire  bow  it 
was  made,  we  sball  find  tbat  we  start  in  tbe  same  way  witb 
natural  products,  sucb  as  soil,  metallic  ores,  beds  of  coal,  rivers 
and  oceans.  Tbese  products  are  at  tbe  basis  of  production, 
and  tbe  most  important  of  tbem  are  found  under  or  in  tbe 
ground.  We  therefore  have  tbe  two  following  propositions : 
I.  Natural  products  are  the  first  requisites  of  production. 

II.  The  principal  natural  products  which  are  material  in 
form  are  found  under  or  are  derived  from  the  soil. 

Another  requisite  to  tbe  coat  is  capital,  of  wbicb  tbe  material 
and  machinery  may  be  considered  typical.  They  are  appliances 
which  have  no  use  in  themselves,  but  without  which  the  coat 
cannot  be  made.  Capital  is  therefore  another  requisite  of  pro- 
duction. 

Yet  another  requisite  is  labor.  Everybody  sees  tbat  a  coat 
cannot  be  made  unless  tbe  drovers,  shearers,  railway  employes, 
operators,  dealers,  and  merchants  all  perform  certain  functions ; 
and  such  performance  we  call  labor. 

But  there  is  yet  another  condition  which  may  be  to  a  certain 
extent  included  under  labor  and  skill,  but  which  nevertheless 
has  a  basis  distinct  from  either.  This  something  is  organiza- 
tion. It  probably  took  many  hundred  men  to  make  the  coat. 
Only  one  man  out  of  all  tbese  knew  who  the  coat  was  for,  and 
he  did  not  know  it  until  the  owner  went  to  buy  it  or  to  order 
it.  All  these  hundred  men  must  work  in  unison,  and  must 
acquire  certain  habits  and  customs  in  order  to  do  their  work  to 
the  best  advantage.  The  men  who  direct  tbem,  especially  those 


72  DESCRIPTION  OF  THE  SOCIAL  ORGANISM.       [II.  19. 

who  bought  and  sold  the  goods,  required  long  experience  to 
know  just  whither  the  wool  and  the  cloth  should  be  taken,  and 
to  whom  they  should  be  sold,  in  order  that  the  wearer  might  get 
his  coat  in  the  most  economical  way.  These  habits,  this  knowl- 
edge, and  this  business  skill  are  things  of  slow  growth  from 
generation  to  generation,  and  being  necessary  to  the  coat  should 
be  considered  requisites  of  production. 

19.  Of  Knowledge  as  a  Requisite  of  Production.  Pro- 
ceeding with  our  inquiry,  we  see  that  another  requisite  equally 
necessary,  though  often  forgotten,  is  knowledge.  In  knowl- 
edge we  may  include  skill  of  any  kind. 

If  men  do  not  know  how  to  cultivate  the  ground,  to  shear 
sheep,  to  spin  and  weave  economically,  and  to  manage  all  the 
complicated  machinery  necessary  in  applying  the  powers  of 
nature,  there  could  be  no  coat  made,  or  at  least  only  a  very 
inferior  and  costly  article.  Knowledge  is  therefore  an  indis- 
pensable requisite,  and  one  for  which  large  sums  of  money  may 
be  paid.  The  owners  of  a  silver-mine  will  readily  give  thou- 
sands of  dollars  to  an  expert  geologist  merely  to  be  informed  of 
the  probable  amount  and  situation  of  the  ore  which  may  be 
contained  within  their  property.  What  they  pay  for  in  this 
case  is  nothing  but  knowledge,  since  the  geologist  they  employ 
is  not  expected  to  do  anything  but  give  them  information. 
Knowledge  is  a  product  of  labor,  since,  omitting  exceptional 
cases,  no  one  can  acquire  it  without  that  exertion  of  the  facul- 
ties called  labor.  The  acquisition  of  knowledge  may  therefore 
be  regarded  as  an  act  of  production.  But  there  are  two  es- 
sential points  in  which  the  acquisition  of  knowledge  differs  from 
other  kinds  of  production. 

I.  Diffusibility  of  Knowledge.  In  general  when  wealth  is 
produced  it  can  be  transferred  only  to  a  limited  number  of  per- 
sons. What  one  person  gets  another  cannot  have.  But  valu- 
able knowledge  may,  by  speaking,  writing,  or  printing,  be  rapid- 
ly diffused  over  the  whole  world.  The  producer  of  knowledge 
may  indeed  keep  it  to  himself  and  seek  to  derive  the  whole 


11.20.]    KNOWLEDGE  A  REQUISITE  OF  PRODUCTION.         73 

benefit  of  it.  But  as  a  general  rule  little  benefit  will  be  ac- 
quired unless  be  transmits  tbe  knowledge  to  otliers.  Among 
men  professionally  engaged  in  tbe  increase  of  knowledge  it  is 
generally  a  matter  of  lionor  to  make  known  to  tbe  world  e very- 
tiling  tbat  tbey  discover. 

II.  Tentative  Character  of  the  Labor  of  acquiring  Knowl- 
edge. Tbe  second  point  in  wbicb  tbe  acquisition  of  knowledge 
differs  from  otlier  kinds  of  production  is  tbat  tbe  acquirer  neces- 
sarily works  in  tbe  dark  to  a  greater  or  less  extent.  As  a  general 
rule  tbe  person  wbo  is  engaged  in  production  knows  exactly 
wbat  be  is  going  to  produce,  and  can  estimate  in  advance  with 
more  or  less  accuracy  tbe  amount  of  labor  wbicb  be  must  ex- 
pend to  attain  a  given  end.  But  in  tbe  pursuit  of  knowledge 
tbe  very  fact  tbat  tbe  investigator  is  intent  on  discovering 
something  not  before  known  implies  a  greater  or  less  degree  of 
ignorance  as  to  wbat  be  is  going  to  learn.  In  consequence 
there  will  sometimes,  though  not  always,  be  doubt  whether  be 
is  going  to  learn  anything  of  value.  Searching  after  knowl- 
edge is  generally  like  seeking  to  discover  whether  a  country 
does  or  does  not  abound  in  mineral  wealth.  Labor  must  be 
spent  in  investigation,  and  until  tbe  work  is  done  it  must  be 
doubtful  whether  any  discovery  of  value  will  be  made. 

2O.  Classification  of  Knowledge.  To  understand  the  rela- 
tions of  the  different  classes  of  knowledge  to  tbe  prosperity  of 
mankind  we  must  examine  more  in  detail  the  different  kinds  of 
knowledge.  We  frequently  hear  the  term  "  useful  knowledge" 
employed.  Tbe  use  of  this  term  implies  the  antithetical  idea 
of  useless  knowledge.  From  a  purely  economic  point  of  view 
this  distinction  has  a  certain  foundation.  Some  kinds  of  knowl- 
edge have  been  applied  so  as  to  increase  the  production  of 
wealth,  while  other  kinds  have  not.  The  former  may  be  called 
useful,  and  the  latter,  so  far  as  the  production  of  wealth  is  con- 
cerned, may  be  called  useless.  It  is  therefore  very  common, 
especially  among  men  of  narrow  views,  to  ask  wbat  is  tbe  use 
of  scientific  investigation  or  of  any  kind  of  learning  wbicb  does 


74  DESCRIPTION  OF  THE  SOCIAL  ORGANISM.       [II.  20. 

not  evidently  conduce  to  the  production  of  wealth.  The  reply 
to  this  is  that  it  is  impossible  to  decide  whether  a  result  of 
investigation  is  or  is  not  useless  until  it  is  fully  mastered  and 
understood.  Even  then  years  or  generations  may  elapse  before 
we  can  ascertain  how  it  is  to  be  applied  in  promoting  the 
good  of  mankind.  As  a  matter  of  fact,  it  is  rarely  found  that 
investigations  made  with  an  immediate  utilitarian  object  in 
view  lead  to  any  result  which  is  of  extended  utility.  The  gen- 
eral experience  of  mankind  shows  that,  in  order  to  attain  re- 
sults of  permanent  value  and  capable  of  the  widest  applications, 
the  ruling  motive  must  be  the  mere  desire  of  learning  and  not 
the  acquisition  of  useful  results.  The  explanation  of  this  seem- 
ing paradox  is  found  in  the  tentative  character  of  the  search 
after  knowledge  already  described.  "We  cannot  know  how  a 
result  is  going  to  be  useful  until  we  have  fully  mastered  it. 

A  body  of  knowledge  collected  and  arranged  with  respect  to 
its  intrinsic  completeness,  and  without  respect  to  its  economi- 
cal applications,  is  called  a  science.  The  relation  which  we 
have  described  between  science  and  the  production  of  wealth 
may  be  illustrated  by  a  glance  at  the  history  of  electricity. 
"When,  two  centuries  ago,  physical  philosophers  began  to  inves- 
tigate the  attractions  and  repulsions  which  were  noticed  be- 
tween bodies  after  being  rubbed  together,  it  was  impossible  to 
foresee  how  these  facts  could  be  turned  to  any  useful  purpose. 
A  hundred  years  later  the  experiments  of  Franklin  were  looked 
upon  with  comparative  indifference  by  his  neighbors.  The 
same  thing  remained  true  when  Galvani  and  Yolta  began  to 
experiment  on  the  contraction  of  the  muscles  of  a  frog's  leg 
produced  when  pieces  of  metal  were  brought  into  contact  with 
it.  Mathematicians  devoted  great  labor  to  investigating  the 
laws  of  the  electric  currents  before  any  utilitarian  application  of 
the  principles  could  be  foreseen.  Thus,  out  of  pure  curiosity 
and  a  desire  for  thoroughness  of  knowledge,  a  science  was  con- 
structed without  any  reference  to  utility. 

But  as  the  science  became  perfected  it  was  found  susceptible 
of  uses  which  its  founders  could  never  have  dreamed  of.  First 


11.21.]    KNOWLEDGE  A  REQUISITE  OF  PRODUCTION.         75 

came  the  electric  telegraph,  which  has  been  gradually  per- 
fected by  the  laws  discovered  by  mathematicians.  Then  came 
the  dynamo  machine,  by  which  a  curious  transformation  of 
physical  forces  was  perfected.  Instead  of  getting  light  di- 
rectly from  combustion  we  may  now  burn  the  coal,  turn  the 
heat  thus  generated  into  energy  by  an  engine,  turn  this  energy 
into  electricity  by  a  dynamo  machine,  and  finally  turn  the 
electricity  into  heat  of  great  intensity,  and  thus  generate  an 
amount  of  light  exceeding  many  times  over  what  could  have 
been  obtained  from  the  original  combustion  of  the  coal.  What 
we  are  to  remember  is  that  all  the  benefits  now  or  hereafter  to 
be  obtained  from  electricity  would  never  have  been  known  had 
not  several  generations  of  philosophers,  out  of  pure  curiosity, 
devoted  themselves  to  the  investigation  of  the  laws  of  that 
agent.  The  same  thing  is  to  a  greater  or  less  extent  true  of  all 
the  modern  applications  of  scientific  principles  to  production. 
The  knowledge  of  these  principles  originates  in  investiga- 
tion undertaken  from  the  desire  of  acquiring  thorough  and 
complete  knowledge,  and  not  with  the  object  of  reaching  any 
evidently  useful  result. 

21.  The  knowledge  just  described  is  that  of  the  laws  of  nat- 
ure. But  after  the  laws  of  nature  are  discovered  another  class  of 
investigation  comes  in.  It  is  necessary  to  discover  by  measure- 
ment and  observation  the  constant  quantities  which  enter  into 
the  expressions  of  these  laws.  For  example,  it  is  a  law  of 
nature  that  heavy  bodies  are  attracted  towards  the  centre  of 
the  earth.  The  mere  knowledge  of  this  law  does  not  tell  us 
how  strong  the  attraction  is.  But  when  we  learn  by  experi- 
ment that  a  heavy  body  in  a  vacuum  falls  sixteen  feet  in  one 
second,  we  have  an  exact  quantity  which  it  is  necessary  to 
know  in  order  to  apply  our  knowledge.  The  attractive  forces 
of  electricity  under  different  circumstances,  the  boiling  points 
of  liquids,  the  pressure  of  gas  and  vapors  at  various  tempera- 
tures and  densities,  the  electric  resistances  of  various  materials, 
and  the  distances  of  the  heavenly  bodies,  are  examples  of  an 


76  DESCRIPTION  OF  TUB  SOCIAL   ORGANISM.       [II.  21. 

indefinite  number  of  physical  constants  which  must  be  known 
in  order  that  natural  laws  may  be  applied  so  as  to  secure  the 
greatest  results  with  the  least  expenditure  of  labor. 

Statistical  and  geographical  knowledge,  maps  of  the  country, 
and  tables  of  fertility  of  the  soil  may  be  considered  as  belong- 
ing to  the  same  class  with  the  knowledge  of  the  constants  of 
nature.  "What  distinguishes  this  class  of  knowledge  is  that  it 
is  not  pursued  in  the  dark  as  one  has  to  pursue  the  discovery 
of  new  laws.  In  determining  a  chemical  constant,  making  a 
map  of  a  country,  or  analyzing  a  soil,  one  may  know  before- 
hand exactly  what  he  has  to  do  and  what  the  general  character 
of  his  result  will  be. 

It  is  an  essential  characteristic  of  all  the  knowledge  just  de- 
scribed that  when  once  found  it  may  be  transmitted  to  man- 
kind in  general.  But  there  is  something  closely  allied  to 
knowledge  which  is  not  thus  transferable.  It  may  perhaps 
be  called  individual  skill  and  power  of  judgment,  rather  than 
knowledge.  The  skill  of  the  mechanic,  the  administrative 
abilities  of  the  president  of  a  railroad,  and  the  business  knowl- 
edge and  skill  of  a  merchant  belong  to  this  class.  All  are 

o  o 

essential  to  the  most  efficient  production.  In  nearly  every 
branch  of  business  a  person  possessed  of  the  proper  talents 
gradually  acquires  a  sort  of  knowledge  by  which  he  in- 
stinctively avoids  mistakes,  forms  correct  judgments  of  what 
should  be  done  under  various  circumstances,  and  thus  acquires 
a  wealth-producing  power  which  inexperienced  persons  would 
not  possess.  If  all  the  producers  of  the  country  should  lose 
the  special  skill  and  faculties  which  they  have  acquired  by 
experience,  a  severe  blow  would  be  struck  at  the  production 
of  wealth. 


11.22.]         OF  NATURAL  AGENTS  AS  REQUISITES.  77 

CHAPTER  IY. 

OF   NATURAL   AGENTS   AS   REQUISITES   OF   PRODUCTION. 

22.  WE  have  seen  that  raw  material  and  natural  produc- 
tions are  the  first  and  most  necessary  requisites  of  production. 
Were  these  requisites  obtainable  by  all  the  world  in  unlimited 
quantities,  the  state  of  society  would  be  entirely  different  from 
what  it  is.  But  if  we  look  around  us  we  shall  see  that  while 
the  supply  of  some  agents  is  substantially  unlimited,  that  of 
others  is  either  limited  in  quantity  or  accessibility.  The  supply 
of  air  is  unlimited.  The  limitations  upon  the  supply  of  water 
for  household  purposes  are  so  few  as  to  be  hardly  worth  taking 
into  account.  But  the  case  is  very  different  with  land  and 
metalliferous  ores.  The  farms  are  necessarily  limited  to  the 
forty  or  fifty  million  of  square  miles  comprising  the  surface  of 
the  continents  and  islands  of  the  earth ;  and  if  we  takeout  those 
portions  which  are  either  uninhabited  or  useless,  the  actual 
available  supply  of  land  will  be  much  smaller.  Ores  and  min- 
erals are  yet  more  limited  in  quantity.  The  streams  which 
can  furnish  water-power  are  generally  few  in  any  one  country. 
The  result  of  this  is  that  it  is  physically  impossible  for  every 
one  to  command  all  of  these  requisites  of  production  which  he 
needs  or  may  think  he  needs. 

In  a  primitive  state  of  society  we  might  imagine  every  man 
to  be  allowed  to  avail  himself  of  his  share  of  the  raw  material 
supplied  by  nature  without  money  and  without  price.  There 
are  enthusiasts  who  advocate  the  trial  of  such  a  system  at  the 
present  time.  But  a  slight  examination  will  show  us  that  it 
would  be  contrary  to  the  instincts  of  human  nature  which 
rule  us  in  such  cases,  and  would  be  impracticable  of  execution 
as  things  now  exist.  We  have  first  to  show  by  what  instincts 
of  human  nature  the  right  of  property  in  an  object  supplied 
by  nature  is  recognized. 


78  DESCRIPTION  OF  THE  SOCIAL  ORGANISM.       [II.  28. 

23.  Of  Appropriation.  If  we  look  back  into  history  to 
learn  how  land,  minerals,  and  other  agents  supplied  by  nature 
could  be  owned  by  individuals,  we  shall  find  it  to  be  through 
the  right  of  appropriation.  There  is  a  natural  feeling  in  the 
breast  of  each  man  that  if  he  discovers  something  which  was 
not  previously  known,  or  at  least  was  not  valued  or  used  by 
any  one  else,  he  has  the  right  to  claim  it  as  his  property,  so  far 
at  least  as  he  is  able  to  take  possession  of  it.  This  right,  how- 
ever, speedily  becomes  limited  and  regulated  by  governments, 
which  claim  the  right  to  make  laws  on  the  subject.  The  gen- 
eral rule  is  that  if  an  island  or  any  new  land  is  discovered  by  a 
citizen  of  any  country,  the  government  of  that  country  claims 
the  right  to  ownership.  Thus  a  large  part  of  the  American 
continent  was  at  one  time  considered  the  property  of  one  or 
another  of  the  governments  of  Europe  which  had  sent  out  ex- 
peditions for  its  discovery.  Thus  also  England  at  various  times 
became  the  owner  of  numerous  islands  which  were  discovered 
by  her  navigators  in  every  part  of  the  globe.  In  new  coun- 
tries the  land  is  considered  the  property  of  the  government, 
which  sells  it  to  individuals.  Thus  in  most  of  the  British 
colonies  there  are  large  tracts  of  land,  known  as  crown  lands, 
not  yet  occupied  by  settlers,  but  which  may  be  sold  to  them  as 
they  require  it.  So,  also,  the  United  States  Government  owns 
large  tracts  known  as  "  public  lands"  in  the  western  Territories, 
and  derives  an  income  of  several  million  dollars  per  annum 
from  their  sale.  When  the  land  thus  becomes  the  property  of 
the  individual,  his  right  to  dispose  of  it  is,  with  some  excep- 
tions, as  absolute  as  his  right  to  dispose  of  anything  he  has 
himself  made. 

The  government,  claims  not  only  the  land,  but  all  the  min- 
erals which  may  be  concealed  beneath  it;  an  individual  be- 
comes the  owner  of  such  wealth  by  first  discovering  that  it 
exists.  He  goes  out  "prospecting"  on  some  portion  of  the 
public  lands  where  his  geological  knowledge  may  lead  him 
to  infer  the  existence  of  minerals,  and  if  he  thinks  he  has  dis- 
covered ores  of  value  he  may  purchase  from  the  government 


11.24.]         OF  NATURAL  AGENTS  AS  REQUISITES.  79 

the  right  to  dig  a  mine  and  appropriate  all  the  ores  he  finds 
to  his  own  use.  Nearly  the  same  rule  holds  in  the  case  of 
diamonds.  When,  for  example,  the  great  diamond-fields  were 
discovered  in  South  Africa,  the  exclusive  right  to  gather  them 
was  granted  to  certain  companies.  Thus  we  perceive  the 
operation  of  the  fundamental  principle  already  alluded  to,  that, 
by  the  instincts  of  our  nature,  the  act  of  discovering  and 
taking  possession  of  land  gives  the  right  of  ownership,  subject 
to  such  limitations  as  the  supreme  power  may  enact.  Now  this 
system  has  both  its  abuses  and  its  reasons.  Let  us  consider  first 
the  reasons  for  it. 

24.  Necessity  of  the  Right  of  Property  in  Natural  Agents. 
If  the  condition  of  land  and  minerals  were  such  that  each  indi- 
vidual could  avail  himself  of  them  without  labor,  the  case  would 
be  much  stronger  in  favor  of  those  who  would  restrict  or  deny 
the  right  of  appropriation.  But  a  little  consideration  will  show 
that,  as  a  matter  of  fact,  it  is  impossible  to  make  any  arrange- 
ments for  the  possession  of  natural  agents  without  devoting 
labor  to  them.  Take  first  the  case  of  land.  Before  a  crop  can 
be  raised  from  it,  trees  must  be  cut  down,  fences  built,  barns 
and  other  structures  erected,  and  fertilizers  purchased  and  ap- 
plied to  the  fields.  It  is  not  worth  while  to  make  these  im- 
provements unless  the  person  who  makes  them  is  to  have  the 
benefit  of  them.  But  it  is  impossible  to  separate  them  from 
the  land.  He  cannot  carry  away  the  house,  the  stables,  the 
fences,  or  the  fertilizers.  Thus  he  cannot  be  deprived  of  his 
right  in  the  land  without  interfering  with  his  exclusive  right 
to  the  product  of  his  own  labor. 

In  the  case  of  anything  concealed  beneath  the  soil,  discovery 
is  necessary  before  it  can  be  utilized.  Now  the  process  of  dis- 
covery is  one  which  requires  skill  and  may  involve  great  labor 
and  hardship.  No  one  is  going  to  subject  himself  to  this  hard- 
ship unless  he  is  to  reap  the  fruit  of  his  discovery.  Practi- 
cally, therefore,  the  right  of  appropriation  in  natural  agents 
cannot  be  denied  without  denying  the  right  of  property  in  the 


80  DESCRIPTION  OF  THE  SOCIAL  ORGANISM.       [II.  24. 

product  of  one's  own  labor.  Moreover,  the  right  to  find  a  mine 
or  to  preempt  a  farm  is  not  confined  to  any  particular  persons 
or  class  of  persons,  but  is  equally  enjoyed  by  every  one  who 
chooses  to  avail  himself  of  his  opportunities.  Thus  natural 
agents  become  private  property  by  a  logical  necessity  which 
mankind  have  in  all  ages  been  obliged  to  accept. 

Objections  stated.  It  must  be  recognized  that  as  the  popu- 
lation of  a  region  increases,  notwithstanding  the  necessity  just 
shown,  the  supply  of  natural  agents  becomes  scarce.  The 
general  rule  is  that  when  land  is  first  occupied,  or  any  natural 
product  discovered,  its  value  is  very  slight.  No  limitation  is 
placed  upon  the  quantity  which  any  one  person  may  own,  and 
thus  there  is  nothing  in  the  way  of  an  individual  possessing 
himself  of  entire  counties  and  perhaps  owning  the  whole  of  a 
valuable  mine.  Now  if  population  did  not  increase  there  would 
be  no  objection  to  this.  But  it  often  happens  that  the  land  so 
little  valued  by  one  generation  is  of  the  greatest  importance  to 
subsequent  generations  who  come  into  the  world  finding  that 
their  ancestors  have  permitted  this  valuable  gift  of  nature  to 
be  inherited  by  a  few  individuals.  Thus  in  England  more  than 
half  the  land  is  nominally  owned  by  a  comparatively  small 
number  of  people.  In  every  part  of  the  world  valuable  mines 
of  coal  and  of  iron,  the  products  of  which  are  most  necessary 
to  the  community  at  large,  are  held  by  a  few  individuals  or  com- 
panies, who  can  command  a  price  for  what  was  originally  a  gift 
of  nature.  Hence  the  view  that  this  system  is  wrong,  and  that 
the  right  of  every  human  being  to  his  share  of  the  gifts  of 
nature  should  be  recognized,  is  not  an  unreasonable  one. 

But  when  we  examine  more  closely  we  shall  see  that  this 
evil  is  to  a  great  extent  compensated  in  various  ways.  "We  can 
at  present  only  indicate  the  compensations  in  a  general  way, 
because  the  full  treatment  of  the  subject  requires  a  knowledge 
of  economical  theories  yet  to  be  acquired.  In  the  first  place, 
we  readily  see  that  if  every  one  were  allowed  at  pleasure  to 
avail  himself  of  all  the  raw  materials  of  nature,  they  would  be 
speedily  exhausted,  so  that  none  might  be  left  for  posterity. 


11.24.]         OF  NATURAL  AGENTS  AS  REQUISITES.  81 

Hence  it  would  be  necessary  to  prescribe  how  much  coal  or 
iron  or  other  minerals  each  individual  should  have.  The 
practical  difficulties  in  doing  this  would  be  insurmountable. 
But  under  our  actual  system  the  care  which  every  prudent 
person  takes  of  his  own  property  is  extended  by  the  owners 
of  natural  agents  to  their  property,  and  thus  the  contents  of 
the  great  storehouses  of  nature  are  protected  from  waste. 

Again,  self-interest  prompts  the  owners  to  allow  the  public 
the  benefit  of  their  possessions  on  nearly  as  good  terms  as  the 
public  could  command  if  the  property  were  public.  It  is  true, 
theoretically  at  least,  that  if  the  right  of  the  land-owner  is 
completely  unrestricted  he  could  fence  in  his  land  and  forbid 
its  being  applied  to  any  useful  purpose.  Practically,  however, 
this  cannot  be  done.  Should  it  be  attempted,  we  may  be  sure 
that  society  would  find  a  way  of  remedying  the  matter.  An 
example  of  how  readily  law  is  provided  to  meet  a  difficult  case 
is  afforded  by  the  decisions  affecting  the  rights  and  obligations 
of  irrigating  companies  in  the  arid  regions  west  of  the  Rocky 
Mountains,  and  especially  on  the  Pacific  coast.  Here  the  very 
existence  of  the  farming  population  depends  upon  a  supply  of 
water  from  mountain-streams  which  are  in  the  possession  of 
companies  who  have  collected  the  water  in  reservoirs  and  con- 
structed the  conduits  and  other  appliances  necessary  to  supply 
the  farms.  Suits  by  the  farmers  against  the  companies  are  not 
uncommon,  and  the  general  result  has  been  a  body  of  law  which 
insures  to  every  farmer  his  supply  of  water  on  the  same  terms 
that  his  neighbors  get  it,  and  as  completely  as  if  the  works  of 
the  irrigating  companies  were  public  property.  In  England 
the  rights  of  the  landlord  are  far  more  restricted  than  in 
America.  Neither  law  nor  public  opinion  allows  him  to  charge 
as  much  as  he  pleases  for  his  land,  as  he  may  do  with  us. 

When  we  are  in  doubt  between  opposing  reasons  we  may 
often  appeal  with  advantage  to  the  instincts  of  human  nature. 
The  fact  that  men  of  all  races  are  ready  to  fight  for  their  land 
may  decide  the  question  for  us. 


82  DESCRIPTION  OF  THE  SOCIAL  ORGANISM.       [II.  26. 


CHAPTER  V. 

OF   CAPITAL. 

25.  THE  use  and  importance  of  capital  arise  from  the  fact 
that  men  cannot,  by  the  direct  application  of  their  labor  to  the 
materials  furnished  by  nature,  produce  those  articles  which  they 
desire.  For  example,  they  cannot  with  their  own  hands  make 
cotton  into  a  shirt.  They  must  have  a  loom  to  effect  the  trans- 
formation. The  farmer  cannot  raise  wheat  without  the  aid  of 
spades,  ploughs,  or  machinery  to  till  the  ground ;  and  after  his 
wheat  is  raised  he  needs  a  mill  to  grind  it  into  flour.  In  these 
cases  the  loom,  the  spade,  the  plough,  and  the  mill  are  not  de- 
sired for  their  own  sake,  but  only  because  they  are  useful  in 
producing  objects  of  desire.  If  we  continue  this  analysis  we 
shall  see  that  the  wealth  of  the  country  may  be  divided  into 
two  portions : 

1.  Wealth  which  is  desired  and  possessed  by  its  owner  for 
its  own  sake,  because  it  contributes  directly  to  the  gratification 
of  the  owner.     Examples  of  such  wealth  are  the  houses  in 
which  we  live,  the  furniture,  books,  and  pictures  which  adorn 
our  walls,  the  clothes  we  wear,  the  food  we  eat,  and  the  coal 
which  is  to  keep  us  warm.     This  kind  of  wealth  we  shall  call 
sustenance. 

2.  Wealth  which  is  desired,  not  for  its  own  sake,  but  in  order 
that  by  it  we  may  obtain  such  wealth  as  we  do  desire  for  its  own 
sake.     Wealth  desired,  not  for  its  own  sake,  but  for  the  sake 
of  the  sustenance  which  it  will  enable  us  to  produce  is  called 
capital. 

The  distinction  between  capital  and  sustenance,  though  logi- 
cally a  sharp  one,  cannot  be  sharply  drawn  in  practice.  We 
cannot  always  decide  without  question  whether  any  given  kind 
of  wealth  is  or  is  not  capital.  We  shall  also  have  to  recognize 


II.  25.]  OF  CAPITAL.  83 

the  principle  that  wealth  may  possess  the  qnality  of  capital  in 
different  degrees,  and  may  be  capital  or  not  according  to  its  re- 
lations t©  its  owner. 

There  is  another  definition  of  capital  which  at  first  sight  may 
seem  to  have  no  relation  to  the  one  just  given,  but  which, 
when  we  examine  it  more  closely,  we  shall  see  to  be  equiva- 
lent as  a  consequence  of  human  nature.  It  is  as  follows : 
Capital  is  that  wealth  from  the  enjoyment  of  which  the  own- 
ers are  abstaining  in  order  to  gain  a  future  profit. 

To  show  how  these  two  definitions  amount  to  the  same  thing, 
let  us  take  first  the  case  of  the  savage  who  possesses  no  power 
of  abstaining  from  present  enjoyment  for  the  sake  of  future 
good.  He  will  not  try  to  make  any  sort  of  machinery,  because 
before  he  can  get  any  good  from  the  machinery  he  will  have  to 
wait  a  long  time,  and  he  is  not  willing  to  spend  his  labor  for 
any  benefit  to  accrue  only  in  the  distant  future.  He  would 
rather  chase  a  buffalo  and  thus  get  a  skin  which  he  can  put  on 
to-morrow  than  undertake  any  labor  which  will  not  yield  him 
good  clothes  until  next  year.  If  he  has  corn,  he  will  pound  it 
between  two  stones,  because  then  he  can  enjoy  the  product  of 
his  labor  the  same  day  when  he  sits  down  to  his  evening  meal. 
But  he  will  not  sow  it  to  raise  a  crop  for  the  next  year. 

Coming  next  to  civilized  men,  we  find  that  large  numbers  of 
them,  even  among  the  well-to-do  classes,  rarely  attempt  to  ac- 
quire wealth  except  for  its  own  sake.  They  expend  all  their 
income  on  house -rent,  furniture,  coal,  food,  clothing,  and 
other  things  desired  for  their  own  sake.  Hence  they  never 
save.  But  if  a  person  wants  to  save  up  money  and  gain  inter- 
est on  it,  he  must  get  something  which  he  does  not  want  for 
its  own  sake,  but  for  the  sake  of  something  else  to  be  obtained 
in  the  future.  "We  may  therefore  say  that  wealth  from  which 
the  owner  is  abstaining  for  a  future  profit  is  identical  with  the 
wealth  which  is  desired,  not  for  its  own  sake,  but  in  order  by 
its  means  to  obtain  more  wealth. 


84  DESCRIPTION  OF  TUB  SOCIAL  ORGANISM.       [II.  27. 

26.  Use  of  the   Term  Sustenance.     We  have  spoken  of 
wealth  which  is  desired  by  the  owner  for  its  own  sake,  and  is 
called  sustenance.     The  most  important  wealth  of  this  kind  is 
the  food  and  clothing  which  every  man  must  have  in  order  to 
live,  and  the  house  which  shelters  him  from  the  weather.     In 
the  case  of  the  laborer  who  saves  nothing,  this  is  the  only  kind 
of  wealth  which  he  works  for  or  seeks  to  possess. 

It  might  at  first  sight  appear  proper  to  confine  this  term  to 
the  food,  clothing,  and  shelter  absolutely  necessary  to  sustain 
the  life,  health,  and  physical  vigor  of  the  laborer.  But  it  is 
well  known  that  we  cannot  draw  any  sharp  line  between  the 
necessaries  and  luxuries  of  life ;  nor  can  we  draw  any  such  line 
between  those  who  are  laborers  and  those  who  are  not.  We 
must  therefore  include  in  the  term  sustenance  not  only  what 
sustains  life,  but  everything  which  a  person  requires  or  can 
command  for  the  purpose  of  unproductive  consumption  by 
himself  and  his  family.  It  includes  pictures,  furniture  and 
books,  and  indeed  everything  which  does  not  produce  other 
wealth  in  the  act  of  being  consumed. 

27.  Classification  and  Examples  of  Capital.    Differences 
of  opinion  sometimes   arise  as  to   whether  special  kinds  of 
wealth  should  or  should  not  be  considered  capital.     To  recon- 
cile these  differences,  we  must  admit  that  capital  is  in  part  a 
relative  term,  depending  not  merely  upon  the  wealth  itself, 
but  on  its  relation  to  its  owner.     If  it  is  something  which  the 
owner  is  not  keeping  for  its  own  sake,  but  from  the  enjoyment 
of  which  he  is  abstaining,  then  it  is  capital  so  far  as  he  is  con- 
cerned, though  it  may  not  be  capital  when  considered  in  relation 
to  the  person  who  is  enjoying  it.     A  difficult  question  of  this 
sort  arises  in  connection  with  dwelling-houses.     When  a  person 
lives  in  his  own  house,  the  house  is  not  capital.     He  is  not 
abstaining  from  the  enjoyment  which  the  house  might  afford, 
and  he  is  keeping  the  house  for  its  own  sake ;  hence  it  is  not 
capital.     But  if  he  rents  the  house  to  some  one  else,  then  he  is 
abstaining  from  the  enjoyment  of  it;  and  he  is  not  using  it  for 


11.27.]  OF  CAPITAL.  85 

its  own  sake,  but  for  the  annual  rent  which  he  is  receiving,  or, 
more  exactly,  for  the  sake  of  the  things  which  he  may  buy  with 
the  rent.  Hence  the  house  is  capital  in  its  relation  to  him.  But 
it  is  not  capital  in  relation  to  the  community  at  large,  for  it  is 
clear  that  houses  are  built  for  their  own  sake,  and  not  to  help 
future  production.  No  more  cloth  is  made  and  no  more  wheat 
brought  to  market  after  a  house  is  built  than  before. 

This  leads  us  to  say  that  the  quality  of  capital  considered  as 
a  relative  term  may  be  algebraically  negative  as  well  as  positive. 
Relative  to  the  tenant  who  lives  in  the  house,  the  house  is 
negative  capital,  because  he  is  enjoying  more  wealth  than  he 
owns.  The  idea  of  capital  as  a  mathematical  quantity  may  be 
reached  by  the  following  course  of  thought : 

Let  us  compare  the  wealth  owned  with  the  sustenance  en- 
joyed by  any  person.  If  we  subtract  from  the  total  wealth 
which  he  owns  all  that  -wealth  which  he  employs  as  suste- 
nance, or  is  making  use  of  for  his  own  enjoyment,  the  remain- 
der will,  by  definition,  be  capital,  because  it  is  that  portion  of 
his  wealth  from  the  enjoyment  of  which  he  is  abstaining. 

But  it  may  happen  that  the  individual  is  enjoying  more 
sustenance  than  he  owns.  In  this  case  the  definition  will  re- 
quire us  to  subtract  a  greater  quantity  from  a  less,  the  result  of 
which  will  be  algebraically  negative.  This  is  the  case  with  the 
improvident  man.  He  has  perhaps  spent  every  cent  he  ever 
earned  on  objects  of  desire,  and  thus  has  not  a  dollar  saved  in 
the  world ;  yet  he  may  be  living  in  a  house  which  cost  ten  thou- 
sand dollars.  Then  he  not  only  never  saved  anything,  but  he  is 
enjoying  what  somebody  else,  namely,  the  owner  of  the  house, 
has  saved.  Thus  he  is  an  algebraically  negative  capitalist. 

The  question  may  arise  whether  by  limiting  capital  to  things 
not  wanted  for  their  own  sake  we  do  not  find  that  after  all 
scarcely  anything  will  be  left  except  capital.  For  example, 
the  barrel  of  flour  in  my  pantry,  it  may  be  said,  is  not  wanted 
for  its  own  sake,  but  for  the  sake  of  the  bread  which  will  be 
made  from  it.  One  may  go  even  farther,  and  inquire  whether 
the  coal  in  my  cellar  is  not  wanted  for  the  sake  of  the  heat 


86  DESCRIPTION  OF  THE  SOCIAL  ORGANISM.       [II.  28. 

it  is  to  furnish,  and  is  not  therefore  capital.  The  reply  to  this 
is  that  we  must  give  a  special  interpretation  to  the  first  defi- 
nition of  capital.  "We  regard  wealth  as  wanted  for  its  own 
sake  whenever  it  has  reached  the  hands  of  the  owner  who  is 
keeping  it  for  his  own  exclusive  use  and  is  not  abstaining  from 
it  for  the  sake  of  the  profit  to  be  gained  thereby.  Hence  when 
the  barrel  of  flour  reaches  the  family  who  are  to  use  it  it  ceases 
to  be  capital,  though  it  is  capital  in  the  store  of  the  grocer,  be- 
cause he  keeps  it  to  get  something  else  with.  And,  in  general, 
all  the  wealth  of  the  country  which  is  going  through  the  pro- 
cesses of  manufacture,  sale,  and  transportation  may  be  consid- 
ered capital. 

28.  Fixed  and  Circulating  Capital.  Economists  divide 
capital  into  fixed  and  circulating.  Fixed  capital  comprises  ma- 
chinery and  public  and  private  works  which  are  employed  as 
agencies  in  production.  Ploughs,  fences,  and  working  animals 
on  a  farm ;  factories  and  the  machinery  which  they  contain  ; 
railways  with  all  their  rolling-stock ;  ships  and  storehouses, 
are  examples  of  fixed  capital. 

Circulating  capital  consists  of  the  money  which  is  circulated 
from  hand  to  hand  in  the  channels  of  trade,  the  material  under- 
going the  process  of  manufacture,  transportation  and  sale,  and 
the  stores  of  food  and  clothing  which  have  not  reached  their 
consumers.  Following  through  the  process  of  production  as 
we  have  already  done,  we  may  say  that  the  wheat  in  the  gran- 
ary, the  sheep  on  the  prairie,  their  wool  after  it  is  shorn,  the 
cotton  in  the  factory,  the  cloth  in  the  hands  of  the  dealer,  and 
the  clothes  in  the  clothing-store  are  all  circulating  capital. 

One  difference  between  the  two  capitals  is  that  the  one  is  a 
direct  aid  to  production,  while  the  other  is  not.  They  there- 
fore possess  the  quality  of  capital  in  different  degrees.  A  loom 
is  a  direct  aid  to  production ;  without  it  we  could  not  make 
cloth.  The  plough  with  its  team  of  horses  is  a  direct  aid ;  with- 
out it  the  farmer  would  have  to  use  a  spade,  which  would  be 
far  less  advantageous.  The  warehouse  is  such  an  aid  because, 


II.  28.]  OF  CAPITAL.  87 

although  it  does  not  help  the  production,  it  preserves  the  goods 
from  being  spoiled  by  the  rain  or  carried  off  by  thieves.  Ships 
and  locomotives  are  direct  aids  in  transportation.  On  the  other 
hand,  the  wool  and  the  cloth  are  not  mere  aids  to  production, 
but  rather  the  material  on  which  the  work  of  production  is 
performed.  They  are  requisites  of  production,  but  not  aids 
to  it. 

"We  may  also  consider  circulating  capital  as  that  a  definite 
quantity  of  which  is  consumed  in  the  production  of  a  definite 
quantity  of  any  commodity.  Thus,  to  make  a  coat  a  definite 
quantity  of  cloth  is  required.  To  make  one  yard  of  cloth  of  a 
certain  kind  a  definite  amount  of  wool  is  required.  Thus  we 
can  trace  the  quantity  of  the  substance  through  from  the  be- 
ginning to  the  end  of  a  series  of  productive  acts.  On  the 
other  hand,  the  needle  with  which  the  tailor  sews  the  cloth 
may  be  lost  before  one  coat  is  finished,  or  it  may  make  a  hun- 
dred coats  without  being  worn  out.  "We  cannot  therefore  say 
just  how  many  needles  are  consumed  in  making  a  given  num- 
ber of  coats. 

A  very  important  part  of  circulating  capital  is  the  store  of 
food,  clothing,  and  other  necessaries  of  life  which  is  laid  up  in 
the  country  for  the  consumption  of  the  population  generally. 
In  fact,  from  the  point  of  view  of  some  economists,  food  is  to 
be  regarded  as  the  primitive  form  of  all  capital.  For,  before 
the  primitive  farmer  or  mechanic  could  have  made  a  plough, 
he  must  have  collected  the  food  to  eat  while  he  was  making 
the  utensil.  During  the  process  of  manufacture  the  food  dis- 
appeared and  the  plough  appeared.  "We  shall  hereafter  see 
that  this  idea  materially  assists  us  in  understanding  the  subject 
by  connecting  labor  with  capital.  From  this  point  of  view  a 
pair  of  boots  is  simply  a  product  of  the  following  requisites : 

I.  A  certain  quantity  of  leather,  pegs,  tacks,  thread,  wax, 
and  other  materials  which  went  into  the  boot. 

II.  A  certain  amount  of  wear  and  tear  of  tools,  rent  of  work- 
shop, etc. 

III.  The  food  which  the-  shoemaker  ate,  the  clothes  which 


88  DESCRIPTION  OF  THE  SOCIAL  ORGANISM,       [II.  29. 

he  wore  out,  and  the  house-rent  which  he  paid  while  he  was 
making  the  boots. 

Since  the  pair  of  boots  is  the  product  of  the  consumption  of 
this  leather,  furniture,  workshop,  house,  food,  and  clothing,  we 
may  establish  a  certain  equivalent  between  them  which  will  as- 
sist us  in  further  researches.  The  labor  of  the  shoemaker  was 
merely  the  agency  which  combined  the  three  elements  just  enu- 
merated into  a  pair  of  boots. 

29.  The  Function  of  Capital.  The  great  purpose  of  capi- 
tal, as  indicated  in  its  definition,  is  of  fundamental  importance 
and  should  be  well  understood.  We  may  state  it  in  the  terms, 
Capital  is  employed  as  a  labor-saving  agent. 

To  show  how  this  is,  let  us  take  the  case  of  the  primitive 
farmer  who  tills  the  ground  with  a  spade.  As  his  condition 
improves,  or  as  the  country  around  him  improves,  he  is  enabled 
to  substitute  a  plough  and  a  pair  of  horses  for  the  spade.  To  find 
whether  this  change  is  advantageous  we  have  to  compare  the  debit 
and  credit  side  of  the  account.  The  plough  and  horses  cost 
money,  or,  which  amounts  to  the  same  thing,  they  required  that 
the  farmer  should  spend  a  certain  amount  of  labor  in  procuring 
them  and  taking  care  of  them.  This  is  the  debit  side  of  the  ac- 
count. The  increased  land  which  they  enabled  him  to  cultivate, 
or  the -diminished  labor  with  which  they  enabled  him  to  culti- 
vate his  field,  forms  the  credit  side  of  the  account.  Unless  the 
gain  compensates  for  the  labor  spent  in  procuring  the  team,  the 
latter  has  not  paid  for  itself.  In  common  language,  it  has  been 
a  bad  investment. 

Again,  in  making  cloth :  a  barbarian  can  make  a  robe  out  of 
coarse  material  with  great  labor.  By  spending  his  labor  in 
making  a  loom  he  will  be  enabled  thereafter  to  make  a  better 
robe  with  far  less  labor.  If  he,  or  the  community  to  which  he 
belongs,  is  able  to  construct  a  factory  and  use  steam  or  water 
power,  a  still  greater  saving  of  labor  is  effected.  But  in  all 
cases  the  labor  saved  must  more  than  compensate  for  the  labor 
of  producing  the  capital.  Unless  the  person  who  produces 


II.  30.]  OF  CAPITAL.  89 

the  capital  expects  to  save  labor,  lie  would  have  had  no  object 
in  producing  it. 

If  we  look  around  us  we  will  see  that  nature  may  be  consid- 
ered as  offering  to  those  who  will  save,  a  perpetual  interest  upon 
their  savings,  if  they  employ  them  judiciously.  An  example 
is  seen  in  the  case  of  great  public  works.  By  the  expendi- 
ture of  a  certain  sum  of  monev  in  digging  the  Suez  Canal  there 

«/  C7O         O 

is  a  perpetual  saving  not  only  for  ourselves,  but  for  future 
generations,  in  the  number  of  ships,  the  quantity  of  sails  and 
coal,  and  the  labor  of  sailors  necessary  to  transport  goods 
from  Europe  to  the  East.  By  digging  the  Panama  Canal  there 
will  be  a  similar  perpetual  saving  of  the  voyage  around  Cape 
Horn.  In  each  case  the  annual  interest  or  profits  on  the 
canal  will  be  the  excess  of  the  saving  above  the  cost  of  work- 
ing the  canal  and  keeping  it  in  its  original  good  condition. 
By  tunnelling  mountains  a  perpetual  saving  is  made  for  the 
future  in  the  cost  of  transporting  goods  across  them.  Every 
railway  which  is  built  diminishes  the  cost  of  transporting  goods 
overland.  Thus  until  men  have  dug  every  useful  canal,  built 
every  necessary  railway,  and  tunnelled  every  mountain  which 
obstructs  the  transportation  of  goods  from  place  to  place,  nature 
will  offer  to  those  who  choose  to  save  their  earnings  a  per- 
petual interest  upon  their  savings,  provided  they  will  employ 
them  in  such  works. 

3O.  Capital  the  Result  of  Abstinence.  It  is  clear  that,  in 
order  to  effect  the  gain  thus  described,  the  labor  of  producing 
the  capital  must  have  been  withdrawn  from  the  production 
of  objects  of  immediate  enjoyment.  The  primitive  farmer 
who  spent  all  his  time  in  spading  the  ground  in  order  to 
obtain  a  bare  support  for  his  family  would  never  save  money 
to  buy  a  plough  and  team.  He  must  do  without  a  certain 
amount  of  the  products  of  his  labor  as  a  condition  precedent 
of  being  able  to  make  the  improvement.  He  may  indeed 
buy  his  capital  on  credit,  but,  apart  from  the  difficulty  that 
his  credit  may  not  be  good,  it  is  then  necessary  that  some  one 


90  DESCRIPTION  OF  THE  SOCIAL  ORGANISM.       [II.  31. 

else  shall  have  abstained  from  the  enjoyment  of  the  fruits 
of  his  labor,  in  order  to  produce  the  plough  and  horses.  This 
last  illustrates  the  case  with  the  vast  majority  of  men.  They 
are  in  the  enjoyment  of  a  large  amount  of  the  previous  labor 
of  other  men,  for  which  they  pay  a  profit.  Thus  the  profit  of 
capital,  commonly  called  interest,  is  what  is  paid  to  the  capi- 
talist, not  for  his  labor,  but  for  his  abstinence  from  the  enjoy- 
ment of  the  products  of  his  labor,  and  his  willingness  to  allow 
others  to  use  his  capital. 

It  may  be  asked  how  circulating  capital  can  be  considered 
either  as  saving  labor  or  as  resulting  from  abstinence,  and 
whether  if  it  does  not  save  labor  it  does  not  fail  to  perform 
the  essential  function  of  capital.  It  is  true  that  it  does  not 
directly  operate  as  a  labor-saving  agent,  but  only  as  an  absolute 
necessity  to  the  progress  of  the  work.  But  it  is  a  requisite  of 
production  which  is  not  intended  for  the  owner's  own  use, 
and  in  order  to  procure  this  requisite  he  must  expend  money 
which  he  otherwise  could  have  spent  in  his  own  enjoyment. 
Since  he  practises  abstinence,  and  since  that  practice  is  itself 
something  which  can  command  money  in  the  public  market,  it 
follows  that  he  must  be  compensated  for  it,  and  thus  a  profit 
must  be  paid  on  this  investment  just  as  it  is  paid  on  the  in- 
vestment of  machinery  in  production. 

31.  Divided  Ownership  of  Capital.  The  forms  of  capital 
which  we  have  just  considered  include  only  material  agencies 
actually  employed  in  production.  But  in  the  language  of 
business  the  word  is  used  in  what  is  apparently  a  much  wider 
sense.  Whenever  men  come  to  bankers  to  purchase  bonds,  or 
other  credit  property  yielding  interest,  they  are  said  to  bring 
"  capital "  in  order  to  invest  it.  In  this  case  the  idea  is  that 
the  entity  called  capital  is  something  which  the  owner  puts 
into  or  invests  in  the  bonds  or  other  things  which  he  purchases. 
But  if  we  look  closely  into  the  matter  we  shall  see  that  in  this 
case  the  word  is  used  to  designate  the  money  which  one  has 
saved  up  to  pay  for  the  bonds  or  stocks  which  he  purchases. 


II.  81.]  OF  CAPITAL.  91 

But  these  bonds  and  stocks  are  also  called  capital.  They 
may  be  government  bonds,  railway  bonds,  mortgages  on  real 
estate,  or  any  immaterial  rights  by  which  one  gains  interest. 
"We  thus  have  two  distinct  meanings  of  the  word  in  addition  to 
that  which  we  have  already  assigned  it.  This  threefold  use 
leads  to  a  confusion  which  must  be  cleared  up.  In  the  origi- 
nal and  proper  sense  of  the  word  capital  consists  of  nothing 
but  wealth,  namely,  that  wealth  which  is  devoted  to  further 
production,  or  employed  in  such  a  way  as  to  yield  a  profit  to 
its  owner.  But  we  have  shown  that  wealth  may  also  be  con- 
sidered in  relation  to  its  owner,  and  when  thus  considered  we 
have  called  it  property.  "We  have  also  shown  how  a  given 
piece  of  wealth  may  have  various  owners  who  have  separate 
kinds  of  rights  in  it,  and  who  may  transfer  these  rights  of 
ownership  to  other  persons. 

Now  the  only  difference  between  material  capital  actually 
employed  in  production  and  the  bonds,  stocks,  notes,  and  other 
securities  which  people  invest  in  is  that  the  one  is  wealth,  while 
the  other  is  right  of  property  in  wealth.  For  the  most  part, 
the  wealth  to  which  this  right  pertains  is  material  capital  of 
some  kind.  Some  illustrations  will  make  this  clear. 

Let  us  first  notice  the  relation  of  railway  bonds  to  the  railway 
itself.  Such  a  bond  is  not  a  part  of  the  railway,  but  it  is  a 
right  to  a  certain  definite  income  from  the  earnings  of  the  rail- 
way. In  the  same  way  railway  stock  is  a  right  of  property  in 
the  railway  itself  and  its  net  earnings  after  its  debts  due  the 
bond-holders  are  paid.  In  these  cases  the  wealth  or  real  capi- 
tal is  the  railway  itself,  while  the  stocks  and  bonds  are  merely 
the  evidences  of  certain  rights  in  the  earnings  of  the  railway. 

Shares  of  stock  in  a  company  which  loans  money  at  inter- 
est consist  in  a  right  to  receive  a  share  of  the  income  from 
the  profits  made  upon  forms  of  material  capital,  whether  rail- 
ways, ships,  or  factories,  which  the  company  loaned  their 
money  to  build.  It  is  therefore  property  in  capital,  but  not 
the  capital  itself. 

Since  the  money  which  one  has  saved  up  to  invest  is  prop- 


92  DESCRIPTION  OF  THE  SOCIAL  ORGANISM.       [II.  81. 

erly  considered  a  part  of  his  wealth,  we  may  call  it  capital, 
because  he  is  going  to  buy  capital  with  it,  although  it  is  not  a 
direct  aid  to  production.  No  confusion  need  arise  from  this 
extension  of  meaning.  "We  now  see  that  the  word  capital  is 
used  in  three  senses,  closely  associated,  yet  not  equivalent : 

I.  In  the  economic  sense,  as  wealth  employed  for  further 
production.     This  may  be  called  absolute  capital. 

II.  To  express  the  rights  of  ownership  in  absolute  capital, 
which  rights  are  secured  by  certain  written  and  printed  instru- 
ments called  bonds,  certificates,  etc. 

III.  To  indicate  the  money  which  one  has  saved  up  and 
which  he  brings  into  market  to  purchase  stocks,  bonds,  or  other 
property  in  capital. 

QUESTIONS. 

1.  Is  it  your  opinion  that  the  knowledge  and  skill  in  production  -which  a 
man  may  acquire  by  long  practice  and  study  should  be  regarded  as  a  part 
of  his  capital?    Compare  the  cases  of  two  men,  one  of  whom  has  saved  his 
wages  to  be  invested  in  bonds,  while  the  other  has  employed  his  in  educating 
himself  so  as  to  command  higher  wages.    What  would  be  the  points  of 
similarity  and  difference  in  the  two  cases?    Point  out  the  economic  im- 
portance of  exchangeability  in  such  cases. 

2.  A  farmer  who  has  annually  expended  $100  in  the  wages  of  men  to 
thresh  his  wheat-crop  concludes  to  invest  $500  in  a  threshing-machine.    The 
machine  lasts  him  ten  years,  and  at  the  end  of  that  time  can  be  sold  for  only 
$100.    Its  care  and  management  have  cost  him  $50  a  year.    Was  it  or  was  it 
not  profitable?    Would  it  have  been  profitable  had  he  borrowed  the  pur- 
chase-money at  15  per  cent   per  annum  interest?     At    20  per  cent  per 
annum? 

3.  Our  newer  cities  frequently  borrow  money  for  the  purpose  of  improve- 
ments.   By  what  criterion  would  you  judge  whether  they  were  to  be  re- 
garded as  negative  capitalists? 

4.  Are  the  street-cars  and  public  carriages  which  run  in  our  cities  a  part 
of  the  capital  of  the  country?    If  not,  in  respect  to  whom  are  they  algebrai- 
cally positive,  and  in  respect  to  whom  algebraically  negative,  capital? 

5.  In  what  case  are  the  books  in  a  private  library  to  be  regarded  as  capital? 

6.  Taking  the  view  of  the  transformation  of  capital  shown  at  the  end  of 
§  28,  what  has  a  railway  manager  to  show  for  the  sustenance  he  consumes? 

7.  Give  some  examples  additional  to  those  in  §  29  of  permanent  improve- 
ments yielding  a  profit. 


II.  32.]  OF  LABOR. 


CHAPTER  VI. 

OF  LABOK. 

IN  the  sense  of  the  definition  of  labor  given  in  §  2  it  will 
be  seen  that  nearly  all  men  are  laborers,  because  they  are 
nearly  all  engaged  in  doing  something  for  a  living.  The  ex- 
ceptions would  be  capitalists  who  live  entirely  from  the  inter- 
est upon  their  investments,  and  owners  of  real  estate  who  live 
entirely  upon  their  rents.  But  the  capitalist  or  owner  gene- 
rally has  a  large  surplus  income  which  he  has  to  manage,  and 
in  this  case  the  work  of  managing  it  might  legitimately  be  con- 
sidered labor.  It  is,  however,  little  more  than  a  question  of 
taste  whether  to  call  it  so  or  not.  Leaving  out  of  consideration 
this  and  other  exceptional  cases,  we  may  see  that  every  able 
adult  man  is  doing  something  to  make  a  living,  and  so  may  be 
called  a  laborer. 

32.  The  Economic  Laboring  Unit.  Only  a  minority  of  the 
population  which  inhabits  a  country  is  actually  engaged  in 
economic  production.  The  general  rule  is  that  the  laborer  has 
a  wife  and  family  to  support.  The  former  is  lending  him  ma- 
terial help  by  cooking  his  food  and  mending  his  clothes;  but 
there  is  no  need  of  our  complicating  the  matter  by  considering 
her  a  separate  agent  in  production.  The  subject  will  be  most 
easily  treated  by  considering  the  laborer  and  his  family  as  a 
unit  in  the  social  organism.  The  producing  power  of  this  unit 
is  in  our  own  country  the  work  of  the  laborer  himself.  Its 
consumption  is  not  only  his  individual  consumption,  but  that 
of  his  whole  family.  Hence  when,  as  in  the  last  chapter,  we 
consider  the  food  and  clothing  consumed  by  the  shoemaker  as 
elements  which  go  into  the  making  tip  of  a  pair  of  boots,  wo 
ought  to  add  the  food  and  clothing  consumed  by  his  family. 


94  DESCRIPTION  OF  THE  SOCIAL  ORGANISM.       [II.  33. 

In  most  European  countries  the  wife  and  even  the  chil- 
dren of  the  laborer  are  obliged  to  take  part  in  the  work  of 
production.  In  this  case  \ve  cannot  so  well  consider  the  fami- 
ly as  a  unit,  and  in  fact  it  would  be  rather  difficult  to  define 
the  unit  with  precision.  Perhaps  the  best  course  would  be  to 
consider  the  number  of  men  who  could  do  the  work  of  the 
whole  family  as  representing  the  number  of  laboring  units  in- 
cluded in  the  family.  "We  should  then  have  to  divide  the 
consuming  power  of  the  family  into  that  number  of  parts  in 
order  to  get  the  relation  of  the  productive  and  consuming 
powers. 

33.  Distinction  of  Laborer  and  Capitalist.  The  typical 
laborer  is  a  man  who  saves  nothing  from  his  income  to  assist 
him  in  future  production,  and  who  is  therefore  dependent  upon 
some  one  else  for  the  capital  to  render  his  labor  effective. 
This  definition  applies  not  merely  to  the  day-laborer,  but  to 
many  in  the  higher  walks  of  life ;  to  any  one,  in  fact,  who  does 
not  save  money  for  investment,  or  own  property  or  capital 
engaged  in  production.  Such  a  person  may  be  a  physician, 
a  lawyer,  a  clergyman,  or  a  general.  The  pliilanthropic  ten- 
dencies of  society,  which  we  shall  hereafter  have  to  consider, 
lead  men  to  look  upon  those  who  live  by  manual  labor  as  form- 
ing a  class  distinct  from  those  who  practise  the  professions  or 
perform  only  mental  labor.  In  economics  this  distinction  is 
of  secondary  importance.  Yet  we  should  recognize  it  wher- 
ever any  essential  question  depends  upon  it. 

It  will  be  seen  that  the  above  definition  of  laborer  would 
not  include  a  shoemaker  who  owned  his  own  tools  and  leather. 
He  would  be  at  the  same  time  laborer  and  capitalist.  Although 
the  laborer  and  capitalist  are  so  often  identical,  there  is  an 
advantage  in  considering  them  as  economically  distinct.  We 
must  therefore  separate  the  functions  of  laborers  from  those  of 
capitalists,  even  when  they  are  united  in  the  same  person. 


II.  35.]  OF  LABOR.  95 

34.  The  Wages  of  Labor.     If  we  define  wages  as  mean- 
ing in  the  widest  sense  the  gainings  of  the  laborer,  then  we 
should  consider  all  classes  of  laborers  as  receiving  wages.    The 
wages  of  the  farmer  and  mechanic  would  be  the  value  of  his 
product  sold  after  paying  all  the  costs  of  raw  material,  rent, 
etc.     It  would  therefore  depend  entirely  upon  his  own  abili- 
ty and  exertions  whether  his  wages  were  great  or  little.     But, 
in  the  ordinary  acceptation  of  the  term,  wages  include  only 
the  moneys  paid  the  laborer  by  an  employer.     This  pay  may 
be  either  according  to  the  time  employed,  so  much  per  day, 
month,  or  year,  or  it  may  be  by  the  piece,  as  in  the  case  of  the 
physician  and  of  many  mechanical  trades.    In  the  first  case  the 
rate  of  wages  would  be  defined  as  the  amount  paid  by  the  em- 
ployer to  the  laborer  per  unit  of  time  in  exchange  for  the 
laborer's  services. 

Although  the  term  wages  is  in  ordinary  language  thus  re- 
stricted, yet  the  wider  sense,  which  includes  all  earnings  by 
the  use  of  one's  faculties,  would  be  the  more  proper  one  in  the 
general  problems  of  political  economy.  "When  we  have  to  con- 
sider the  case  of  a  person  who  is  obliged  to  work  for  somebody 
else,  in  contradistinction  to  the  person  who  is  not,  then,  and 
then  only,  is  a  distinction  between  wages  and  other  earnings 
necessary. 

35.  Of  the  Different  Kinds  of  Labor.   Prof .  F.  A.  Walker 
divides  labor  and  laborers  into  the  following  five  classes: 

I.  The  class  who  work  for  themselves  and  by  themselves, 
either  on  their  own  land  or  in  mechanical  trades.     This  class 
would  include  small  farmers  taking  part  in  the  cultivation  of 
their  own   ground,  shoemakers  who   owned   and   sold  their 
own  products,  as  well  as  many  other  workers  in  mechanical 
trades.     These  persons  combine  the  functions  of  laborer  and 
capitalist. 

II.  The  tenant  occupier  of  land  who  owns  the  whole  pro- 
duce, subject  only  to  the  deduction  for  rent. 

III.  Persons  who  render  personal  services  for  pay,  but  not 


96  DESCRIPTION  OF  THE  SOCIAL  ORGANISM.       [II.  35. 

in  order  to  assist  their  employers  in  production.     Such  per- 
sons are  domestic  servants,  soldiers,  and  clergymen. 

IV.  Persons  working  for  hire  who  are   paid   out  of  the 
product  of  their  industry,  and  whose  employers  expect  to  make 
a  profit  out  of  their  services. 

V.  Persons  who  employ  and  manage  labor,  and  who  conduct 
and  control  business  operations. 

There  is,  however,  no  one  classification  which  will  answer  all 
the  purposes  of  economics :  the  various  kinds  and  conditions 
of  labor  merge  into  each  other  in  such  a  way  that  a  scientific 
classification  is  scarcely  possible.  From  the  point  of  view  of 
practical  politics  the  most  important  distinction  is  that  between 
laborers  who  work  by  time,  that  is,  who  are  employed  by  the 
hour,  day,  or  month,  and  those  whose  gains  depend  entirely  upon 
what  they  produce,  irrespective  of  the  time  it  has  taken  them 
to  produce  it.  The  importance  of  this  distinction  arises  from 
the  liability  of  workers  by  time  to  be  dissatisfied  with  their 
wages.  When  one's  gains  depend  upon  what  he  actually  does, 
he  can  more  readily  decide  upon  the  justice  or  injustice  of 
what  he  receives  than  when  he  works  by  time.  Whether  the 
day-laborer  talks  about  his  own  wages,  or  whether  the  philan- 
thropic public  talk  about  his  wrongs,  there  is  in  either  case 
an  entire  want  of  perception  of  the  relation  between  the  money 
he  receives  and  the  wealth  which  he  is  helping  to  produce. 
When  one  works  by  the  piece  for  an  employer,  the  evil  is  less- 
ened, though  not  entirely  done  away  with.  It  may  be  difficult, 
and  even  impossible,  for  the  laborer  to  decide  to  his  own  satis- 
faction whether  what  his  employer  pays  him  per  piece  is  the 
just  equivalent  of  what  he  does  on  that  piece.  Yet  the  rela- 
tion between  his  labor  and  what  he  receives  from  the  product 
is  more  evident  than  in  the  case  of  the  day-laborer. 

The  man  who  sells  the  products  of  his  labor  directly  to  the 
public  is  on  a  higher  plane  than  either  of  the  preceding :  he 
buys  such  materials  as  he  needs  where  he  can  get  them  on  the 
best  terms,  he  labors  as  much  or  as  little  as  he  pleases,  and  he 
sells  to  the  best  advantage  he  can.  His  position  is  therefore 


IL  86.]  OF  LABOR.  97 

such  as  to  give  him  a  much  more  accurate  view  of  his  relations 
to  society  than  if  he  is  subject  to  an  employer.  In  buying  his 
material  he  feels  that  he  has  the  whole  market  to  choose  from, 
and  that  it  is  wise  to  be  satisfied  with  the  price  which  he  is 
obliged  to  pay.  If  he  finds  that  his  product  will  not  command 
so  high  a  price  this  week  as  it  did  last,  he  accepts  the  result 
as  one  of  the  obvious  necessary  drawbacks  of  society,  and  does 
not  fight  against  the  inevitable  as  the  day-laborer  sometimes 
does.  If  he  finds  an  increase  in  the  price  of  his  product,  he 
takes  prompt  advantage  of  it,  and  does  not  see  the  employer 
get  all  the  advantage  of  it  as  the  day -laborer  does. 

From  the  laborer's  point  of  view  it  is  unimportant  whether, 
when  he  works  under  an  employer,  he  is  engaged  in  productive 
or  unproductive  work.  That  is  to  say,  it  makes  no  difference 
whether  he  is  merely  administering  to  his  employer's  gratifica- 
tion by  taking  care  of  his  horses,  beautifying  his  grounds,  and 
administering  to  his  wants,  or  whether  he  is  making  things  for 
him  to  sell.  But  from  an  economic  point  of  view  this  dis- 
tinction is  the  most  important  one  of  all.  In  other  Avords, 
"Walker's  third  class,  whose  services  to  society  terminate  with 
their  employers,  form  economically  a  class  by  themselves,  hav- 
ing entirely  different  functions  from  those  of  all  other  classes. 

36.  The  Modern  Organization  of  Labor.  If  we  compare 
our  industry  with  that  of  past  ages  we  shall  see  that  its  most 
remarkable  feature  is  the  large  scale  on  which  manufacturing 
operations  are  conducted,  and  the  number  of  persons  who  con- 
tribute to  each  product.  Necessarily  connected  with  this  is  a 
complexity  of  operations  formerly  unknown.  A  hundred  years 
ago  there  was  only  one  best  way  known  to  make  every  part  of 
a  gun,  and  that  way  had  been  known  and  followed  for  so  many 
generations  that  any  person  of  fair  mechanical  talent  could 
learn  to  make  a  gun  as  well  as  any  one  else.  In  nearly  all  the 
trades  a  regular  apprenticeship  was  gone  through  with;  the 
boy  became  a  journeyman,  and  the  journeyman  in  time  be- 
came a  master- workman.  Each  did  his  work  as  generations 
7 


98  DESCRIPTION  OF  THE  SOCIAL  ORGANISM.       [II.  37. 

before  him  had  done  it,  and  each  supplied  only  a  limited  com- 
munity immediately  around  him.  Transportation  was  so  cost- 
ly that  nearly  all  bulky  commodities  had  to  be  produced  near 
the  place  where  they  were  consumed,  and  none  but  those  which 
had  great  value  in  a  small  space  could  be  transported  to  any 
great  distance  overland,  except  at  a  corresponding  disadvantage. 
Modern  inventions,  especially  the  steam-engine,  the  railway, 
and  labor-saving  machinery,  have  changed  all  this.  Three  new 
factors  have  come  into  play : 

I.  The  division  and  combination  of  labor.     Instead  of  one 
man  finishing  an  article  for  himself,  he  may  do  only  a  minute 
part  of  it,  and  it  may  go  through  scores  of  hancls  before  being 
finished. 

II.  The  substitution  of  labor-saving  machine?")/  for  human 
hands  in  production.     Single   pieces  of  machinery  will  do 
work  which  would  have  required  hundreds  of  men ;  thus  pro- 
duction on  a  large  scale  is  facilitated. 

III.  The  construction  of  railways,  whereby  it  has  become 
possible  to  collect  and  manufacture  most  articles  in  great  cen- 
tral establishments. 

These  three  factors  are  inseparably  connected.  Without 
cheap  transportation  manufacture  on  a  large  scale  could  not 
have  been  advantageous.  Labor-saving  machinery  can  be  used 
only  when  the  sale  of  the  commodity  is  sufficiently  great  to 
justify  the  construction  of  the  machine. 

37.  The  Division  of  Labor.  The  term  division  of  labor 
is  applied  to  that  system  under  which,  instead  of  each  laborer 
completing  an  article  of  manufacture,  a  number  of  laborers 
divide  the  work  up  in  such  a  way  that  each  person  shall  do  re- 
peatedly a  small  portion  of  it.  A  striking  example  is  seen  in 
a  modern  American  watch-factory.  Instead  of  one  person 
making  a  whole  watch,  hundreds  of  hands  unite  their  labors. 
Each  different  kind  of  wheel  is  made  independently  by  a  sep- 
arate person.  Each  person  who  makes  these  separate  parts 
puts  his  product  in  a  little  case  by  itself.  An  operative  takes 


II.  38.]  OF  LABOR.  99 

from  each  case  the  parts  necessary  to  make  one  watch,  and 
puts  them  in  a  box.  He  is  doing  this  nearly  all  the  time.  The 
box  containing  the  parts  necessary  to  one  watch  is  handed  to 
an  operative  near  one  end  of  a  long  table.  This  operative  puts 
together  a  certain  portion  of  the  watch,  and  passes  it  to  the 
next  one.  The  operation  is  repeated  as  the  box  goes  from 
hand  to  hand,  and  thus,  in  a  few  minutes,  what  at  one  end  of 
the  table  had  been  a  miscellaneous  pile  of  screws,  wheels,  and 
pieces  of  brass  appears  at  the  other  end  of  the  table  a  finished 
watch. 

The  advantage  of  the  division  of  labor  is  that  a  given  num- 
ber of  persons  can  complete  a  much  larger  product  than  they 
could  working  singly.  The  reason  of  this  is  that  a  skill  is  ac- 
quired in  the  performance  of  one  operation  which  could  not 
be  acquired  if  the  person  had  to  learn  a  great  many  operations, 
and  that  the  time  of  passing  from  one  to  the  other  is  saved. 
Moreover,  the  number  of  tools  and  other  appliances  required 
is  greatly  diminished.  If  one  person  had  to  finish  the  product, 
he  would  need  to  command  all  the  tools  necessary  for  all  the  • 
processes.  When  doing  but  a  single  process,  he  only  needs  the 
tools  necessary  for  that  one. 

The  disadvantage  of  the  division  of  labor  is  that  when  car- 
ried to  the  fullest  extent  it  dwarfs  the  mental  development 
of  the  individual.  But  lamentations  over  the  sad  lot  of  the 
man  who  spends  his  whole  life  in  making  the  tenth  part  of  a 
pin  belong  to  the  moralist  and  philanthropist,  rather  than  to 
the  economist.  Such  a  man  may  be  regarded  as  an  extreme 
example  of  the  effects  of  civilization,  since  his  life  contrasts 
most  strongly  with  that  of  the  savage  roaming  at  pleasure 
over  the  plains. 

38.  Labor-saving  Machinery.  Before  the  invention  of  cot- 
ton-spinning machinery  and  power  looms,  wool  had  to  be  spun 
and  cloth  woven  by  hand.  "  Each  weaver's  cottage  formed  a 
separate  and  independent  little  factory.  The  yarn  for  his  warp 
was  bought  by  him  in  a  prepared  state,  the  wool  for  his  welt 


100  DESCRIPTION  OF  THE  SOCIAL  ORGANISM.       [II.  39 

was  carded  and  spun  by  the  female  members  of  his  family,  and 
the  cloth  was  woven  by  himself  and  his  sons."  *  Of  course  the 
present  system  was  not  substituted  for  this  ancient  one  at  a 
single  step.  The  greatest  step,  however,  and  that  from  which 
it  is  usual  to  date  our  modern  cotton  manufacture,  was  the 
invention  of  the  spinning-jenny  and  throstle,  by  Hargreaves 
and  Arkwright,  about  1770.  The  result  of  this  is  that  more 
cloth  is  now  manufactured  by  a  limited  number  of  operatives 
than  without  machinery  could  be  produced  by  the  united  labor 
of  the  whole  world. 

The  invention  and  application  of  labor-saving  machinery  is 
a  process  which  is  continually  going  on,  and  to  which  it  is  dif- 
ficult to  see  any  limit.  The  mere  enumeration  of  the  kinds  of 
machinery  now  used  in  special  branches  of  manufacture  would 
fill  a  book.  The  boots  on  our  feet,  the  coats  on  our  backs,  the 
watches  in  our  pockets,  the  furniture  in  our  houses,  are  now 
mostly  made  by  machinery,  and  all  that  human  hands  have  to 
do  is  to  direct  and  feed  the  machine. 

39.  Steam  Transportation.  A  century  ago  the  number  of 
people  who  could  be  supplied  with  any  but  the  lightest  articles 
of  manufacture  from  a  single  point  was  greatly  limited  by  the 
cost  of  transportation.  It  is  difficult  for  us  to  imagine  a  state 
of  things  in  which  goods  could  be  brought  overland  from  one 
point  to  another  only  in  wagons  drawn  by  horses,  mules,  or 
oxen.  Steam  navigation  has  done  much  to  facilitate  trans- 
portation across  the  ocean,  but  has  been  more  effective  in  facil- 
itating intercourse  between  men  than  it  has  in  transporting 
goods,  since  even  now  the  heavier  and  cheaper  style  of  goods 
are  still  carried  across  oceans  by  sailing-ships.  But  on  land 
the  railway  has  worked  a  complete  revolution.  The  most 
important  effect  of  this  revolution  is  this:  that  all  but  the 
heaviest  goods  can  be  carried  a  thousand  miles  at  a  cost  which 
is  comparatively  small  compared  with  that  of  their  manufac- 

*  Encyclopaedia  Britannica,  9th  edition.    Art.  Cotton. 


II.  40.]  OF  LABOR.  101 

tare  on  a  small  scale.  Roughly  speaking,  the  cost  of  trans- 
portation over  long  distances  on  the  competing  lines  of  rail- 
ways is  from  three  quarters  of  a  cent  to  two  cents  per  ton  per 
mile.  A  pound  weight  is  carried  from  one  to  two  thousand 
miles  at  the  cost  of  a  single  cent.  If  a  pair  of  boots  be  made 
in  New  York  and  delivered  in  Chicago,  the  additional  cost  due 
to  transportation  will  not  be  ten  cents. 

Thus  arises  a  tendency  to  concentrate  in  great  establish- 
ments the  manufacture  of  those  articles  which  are  widely  used 
and  are  not  very  heavy.  "We  may  imagine  that  ten  millions 
of  people  scattered  over  a  tract  a  thousand  miles  broad  could 
have  all  their  clothing,  boots,  furniture,  and  books  made  at  one 
central  point.  This  would  enable  the  division  of  labor  to  be 
carried  to  the  greatest  extent,  the  most  improved  forms  of 
machinery  to  be  introduced,  and  all  the  advantages  of  manu- 
facturing on  a  large  scale  to  be  made  available.  Although  this 
state  of  things  is  by  no  means  reached,  we  see  a  continual 
approximation  towards  it,  in  the  increasing  number  of  great 
manufacturing  establishments  which  can  supply  large  tracts  of 
country  with  goods  more  cheaply  than  they  can  be  made  in 
the  place  where  wanted. 

To  do  this  successfully  requires  organization.  In  organiza- 
tion two  elements  are  necessarv :  there  must  be  willingness  on 

•/  ~ 

the  part  of  laborers  to  become  parts  of  the  organization,  and  to 
work  conscientiously  and  persistently  in  that  capacity,  and 
there  must  be  organizers  of  their  labor.  To  the  latter  class 
our  attention  is  next  to  be  directed. 

4O.  T7te  Organizers  of  Labor.  If  the  laborers  whose 
work  is  to  be  combined  in  the  modern  system  could  all  work 
together  in  unison,  and  do  everything  necessary  to  success 
without  any  one  to  guide  and  direct  them,  modern  society 
would  be  very  different  from  what  it  is.  But  as  a  matter  of 
fact  they  cannot  do  this.  Thus  the  necessity  of  an  organizing 
power  arises.  This  organizing  power  is  as  important  as  the 
labor  itself ;  and  in  one  sense  it  is  more  so,  because  there  are 


102          DESCRIPTION  OF  THE  SOCIAL  ORGANISM.       [II.  40. 

hundreds  of  men  who  are  fit  to  labor  to  one  who  is  tit  to 
organize  and  direct. 

We  may  illustrate  the  necessity  of  an  organizer  by  adducing 
a  familiar  and  not  at  all  extreme  case,  that  of  building  a 
house.  When  one  looks  at  a  house  in  connection  with  labor, 
he  is  prone  to  think  of  it  merely  as  the  product  of  the  work 
of  so  many  bricklayers,  hod-carriers,  carpenters,  plasterers, 
and  glaziers.  But  if  we  look  closely  into  the  matter  we  can 
see  how  badly  these  laborers  would  have  got  along  without 
a  managing  head.  The  bricklayers  would  not  have  known 
where  they  could  have  bought  the  brick  and  sand  suited  to  the 
house  on  the  most  economical  terms.  They  would  probably 
get  all  their  material  at  once,  and  on  mixing  their  mortar  find 
that  they  had  forgotten  the  necessity  of  its  ripening  before  the 
building  was  commenced.  During  the  week  or  two  required 
for  this  purpose  they  might  have  to  remain  idle.  On  com- 
mencing work  they  would  have  endless  trouble  in  deciding 
what  each  man  should  do  and  how  the  money  should  be 
divided.  They  would  probably  misunderstand  the  plans,  build 
wrong,  and  have  to  begin  over  again  in  consequence.  When 
the  time  came  to  put  in  the  first  window-frame  they  would 
find  that  the  carpenters  were  not  ready  with  the  material,  and 
would  have  to  wait  for  them.  The  same  difficulty  would 
occur  in  laying  the  joists,  and  would  repeat  itself  oftener 
and  oftener  at  every  stage  of  the  process.  The  final  result 
would  be  either  that  the  house  would  never  get  built  at  all  or 
would  get  very  badly  built,  and  that  only  after  the  men  had  put 
into  it  twice  as  much  labor  as  they  would  have  done  under 
competent  direction. 

To  describe  the  functions  of  the  manager  more  in  detail : 
He  must  see  that  all  the  necessary  raw  materials  are  purchased 
in  the  best  markets  and  at  the  proper  time  ;  that  they  are  of 
proper  quality  and  are  suited  to  his  machinery  and  labor ;  that 
they  arrive  at  the  factory  at  the  proper  moment ;  that  the  fac- 
tory is  ready  to  receive  them,  and  that  they  are  so  cared  for 
as  not  to  suffer  deterioration  from  any  external  or  internal 


II.  41.]  OF  LABOR.  103 

cause ;  that  the  machinery  is  kept  in  good  order ;  that  the 
various  employes  know  their  business ;  that  the  least  possible 
amount  of  waste  occurs  while  the  processes  are  going  on  ;  that 
the  things  made  are  those  which  other  people  want,  and  that 
they  are  made  in  the  proper  quantities  ;  that  arrangements  are 
made  for  preserving  them  until  they  can  be  sold  ;  that  the  em- 
ployes are  paid  at  the  proper  times  ;  that  useful  improvements 
in  the  machinery  are  introduced,  while  no  money  is  wasted  in 
unsuccessful  experiments ;  that  the  proper  number  of  opera- 
tives are  at  work  in  every  department,  and  that  they  are  the 
persons  best  suited  to  perform  their  respective  duties.  In  a 
word,  the  manager  must  see  that  every  one  of  the  countless 
causes  that  might  lead  to  the  injury  of  so  complicated  and  deli- 
cate an  organization  is  carefully  guarded  against.  The  ability 
to  do  all  this  well  is  so  rare  that  we  must  look  upon  the  manager 
as  the  most  important  factor  in  the  work  of  production  on  a 
large  scale. 

41.  The  Efficiency  of  the  Laborer.  We  have  spoken  of 
the  laboring  unit  in  a  way  which  might  imply  that  one  such 
unit  could  be  considered  the  equivalent  of  another.  Such, 
however,  is  by  no  means  the  case.  It  is  impossible  to  measure 
the  labor  of  a  railway  manager  and  that  of  the  digger  of  a 
canal  by  any  common  standard.  This  is  obvious  enough.  But 
it  is  also  true,  though  not  so  obvious,  that  we  cannot  assume 
any  equality  between  laborers  of  different  classes,  even  when 
they  are  engaged  in  similar  kinds  of  work.  The  result  of  the 
day's  work  depends  upon  the  man  who  does  it,  what  he  does  it 
with,  and  what  he  does  it  for;  and  when  any  of  these  three 
factors  are  different  the  result  is  different.  Laborers  differ 
among  themselves  in  hereditary  capacity  for  work,  and  their 
efficiency  depends  upon  their  food  and  their  abilities.  A 
single  beef-fed  English  laborer  is  the  equivalent  of  several, 
we  could  hardly  say  how  many,  under-fed  Russian  peasants. 
If  we  are  to  compare  them,  we  should  consider  a  group  of  the 
latter  as  representing  a  single  one  of  the  former. 


104          DESCRIPTION  OF  TUB  SOCIAL   ORGANISM.       [II.  41. 

Disposition  to  labor  is  equally  important  with  physical 
strength.  Certain  races  of  men  will  not  work  more  than  ab- 
solutely necessary  for  their  subsistence  on  any  account  what- 
ever ;  other  races  would  be  unhappy  without  constant  employ- 
ment. 

This  explains  the  fact  that  those  countries  where  wages  are 
high  compete  successfully  with  those  where  they  are  low.  For 
example,  although  nominal  wages  are  fifty  per  cent  higher  in 
America  than  in  England,  and  twice  as  high  in  England  as  on 
most  of  the  continent  of  Europe,  yet  American  manufacturers 
of  cotton  can  compete  with  those  of  England  on  even  terms, 
while  but  few  European  countries  can  compete  with  either  of 
them,  and  feel  obliged  to  protect  their  home  manufacturers  by 
protective  tariffs.  The  docility  and  know-how  of  the  American 
enables  him  to  manage  machinery  so  much  better  than  his 
European  competitor  that  the  cost  of  the  labor  put  into  a  yard 
of  cotton  is  actually  less  here  than  in  any  other  part  of  the 
world. 

Of  course  the  efficiency  of  the  laborer  depends  also  upon 
his  adaptation  to  his  special  work.  For  the  work  of  digging  a 
canal  nothing  but  physical  strength  is  necessary.  But  if  we  con- 
sider any  work  higher  than  that  of  carrying  and  digging,  we 
shall  find  that  the  laborer  needs  qualifications  of  a  higher  order 
than  mere  physical  strength.  If  he  learns  a  trade,  the  time 
required  for  this  purpose  will  depend  largely  upon  his  natural 
aptitude.  If  he  does  not  possess  a  certain  amount  of  skill  he 
can  never  be  entrusted  to  manage  a  machine.  Thus  his  effi- 
ciency would  be  greater  or  less  according  to  his  natural  or 
acquired  qualities.  Finally,  it  goes  without  saying  that  one 
class  of  laborers  might  do  one  kind  of  work  better,  and  another 
class  another  kind.  As  an  example  showing  how  national  habits 
affect  the  efficiency  of  labor,  we  may  cite  a  drawback  under 
which  manufacturers  labor  in  Russia.  The  religious  holidays, 
which  the  common  people  of  that  country  consider  it  impera- 
tive to  observe,  are  so  numerous  and  come  at  such  irregular 
intervals,  that  great  manufacturing  establishments  requiring 


II.  42.]  OF  LABOR.  105 

regularity  for  their  economical  management  can  scarcely  be 
managed  without  the  aid  of  foreign  labor.  When  the  holiday 
comes,  the  Russian  laborer  must  leave  his  work  no  matter  what 
the  state  of  affairs,  the  pressure  of  steam,  or  the  need  of  his 
being  present  to  carry  on  the  operations  of  the  establishment. 

42.  Friction  of  Exchange.  The  kinds  of  labor  described 
in  the  preceding  sections  are  those  entirely  devoted  to  the 
work  of  production.  But  if  we  use  the  terms  labor  and  laborer 
in  their  most  general  sense,  we  should  include  all  exertion  of 
the  human  faculties  necessary  to  keeping  the  social  organism  in 
operation.  Among  the  operations  necessary  for  this  purpose,  one 
of  the  most  important  is  that  of  exchange  ;  hence  whatever  time 
or  work  is  required  in  effecting  exchanges  should  be  included 
under  the  head  of  labor.  "We  have,  therefore,  another  class  of 
laborers  whose  function  it  is  merely  to  buy,  to  take  charge  of 
and  to  sell  commodities,  without  any  changes  being  made  in 
them  in  other  respects.  This  class  includes  bankers,  brokers, 
merchants,  shop-keepers,  and  retail  dealers  of  every  kind. 

On  a  superficial  view  this  labor  does,  not  really  appear  to  be 
a  necessity  of  the  social  organism.  If  the  producer  of  a  com- 
modity sends  it  at  his  own  expense  to  the  very  place  where  the 
consumer  lives,  and  the  latter  is  willing  to  go  and  get  it,  why 
should  a  third  party  step  in  to  take  a  portion  of  the  price  ?  The 
answer  is  that  if  his  services  were  not  valuable,  men  would  cer- 
tainly not  pay  for  them.  Quite  possibly,  if  human  nature  were 
a  little  nearer  perfection  than  it  is,  and  if  men  knew  their 
wants  exactly  and  adopted  the  best  system  for  supplying  them, 
we  could  get  along  with  a  good  deal  less  labor  in  conducting 
exchanges.  There  is  a  certain  analogy  between  the  necessity 
for  this  labor  and  friction  in  machinery.  In  a  perfect  machine, 
as  it  is  conceived  in  the  mind  of  the  mathematician  or  phy- 
sicist, there  need  be  no  friction.  But  in  all  machines  actually 
made  by  man  there  is  friction,  and  the  mathematician  who 
calculates  the  forces  necessary  to  rnn  it  must  take  this  friction 
into  account  as  a  resistance  requiring  additional  power  to  be 


106  DESCRIPTION  OF  TUE  SOCIAL   ORGANISM.       [II.  43. 

applied.  So  the  cost  of  getting  a  barrel  of  flour  from  a 
firm  in  New  York  City  to  a  baker  in  England  is  not  only 
the  cost  of  freight  and  of  the  handling  and  carrying  of  the 
flour,  but  also  certain  profits  or  wages  of  jobbers,  grocers,  ship- 
pers, and  others  who  have  to  buy  the  flour  from  one  party  and 
sell  it  to  another.  From  the  analogy  of  this  labor  to  the  power 
required  to  overcome  friction  in  a  machine  we  shall  call  what 
it  overcomes  friction  of  exchange. 

In  the  wholesale  markets,  where  goods  are  bought  and  sold  on 
a  large  scale,  the  friction  of  exchange  is  very  small.  It  attains 
its  minimum  in  the  sale  of  stocks  at  the  great  money  centres. 
The  commission  of  the  broker  is  here  only  about  one  eighth  of 
one  per  cent.  It  is  larger  where  goods  of  any  sort  are  traded  in, 
because  the  man  who  buys  the  goods  must  always  run  some  risk 
of  their  deteriorating  on  his  hands ;  but  in  wholesale  transac- 
tions it  is  still  too  small  to  be  a  very  important  factor  in  the  ulti- 
mate price  to  the  consumer.  The  friction  attains  its  maximum 
in  the  sale  at  retail  of  those  commodities  which  are  most  likely 
to  deteriorate  or  become  worthless  in  the  hands  of  the  dealer. 
It  is  also  great  in  the  case  of  those  goods  sold  in  quantities  so 
small  that  the  time  spent  by  the  dealer  in  showing  them  to  his 
customers,  or  wrapping  them  up,  has  a  value  equal  to  an  impor- 
tant fraction  of  the  value  of  the  goods.  For  reasons  which  the 
reader  can  readily  work  out  for  himself,  books,  fancy  goods, 
including  haberdashery,  and  fresh  vegetables,  are  among  the 
things  for  which  the  friction  of  exchange  is  greatest. 

With  the  labor  necessary  to  overcome  the  friction  of  exchange 
must  be  included  that  of  merely  inducing  people  to  buy  things 
which  they  would  not  buy  if  left  to  themselves.  Very  often  a 
man  who  does  this  successfully  may  get  one  third,  one  half,  or 
even  two  thirds  of  the  price.  The  labor  of  travelling  book- 
agents  is  an  example.  In  country  districts,  where  there  are  no 
stores  within  convenient  reach,  the  services  of  peddlers  may  be 
really  necessary,  but  in  cities  we  must  consider  their  principal 
function  to  be  that  of  persuading  people  to  buy  their  wares. 


H.  44.  J  THE  INCREASE  OF  POPULATION.  107 


CHAPTER  VII. 

THE    INCREASE   OF   POPULATION. 

43.  IF  the  population  of  the  world  were  immortal,  the  gen- 
eral  conditions    of    production,   exchange   and   consumption 
would  not  differ   materially  from  those  that   actually  exist. 
Hence  in  the  general  review  which  we  have  thus  far  taken,  it 
has  not  been  necessary  to  consider  the  economic  effect  of  the 
continual  death  of  men,  and  of  the  constant  stream  of  new  births 
by  which  the  ranks  of  humanity  are  kept  full.     But  when  we 
apply  economics  to  social  questions,  it  often  becomes  necessary 
to  take  the  effect  of  human  mortality  and  growth  into  account. 
The  introduction  of  this  additional  cause  affecting  wealth  nec- 
essarily modifies  our  economic  conclusions,  and  requires  new 
and  different  statements.     The  general  rule  is  that  every  man 
not  only  has  to  live,  but  to  support  his  family  also.    The  princi- 
pal question  which  arises  in  this  connection  is  that  of  the  eco- 
nomic effects  of  the  more  or  less  rapid  increase  of  population. 
These  effects  were  discussed  in  all  their  relations,  and  elaborated 
into  a  complete  system,  by  Malthus,  in  the  early  part  of  the 
present  century,  and,  in  consequence,  the  conclusions  to  which 
he  was  led  are  commonly  known  as  the  Malthusian  theory  of 
population.    This  theory  has  been  accepted  as  sound  by  a  large 
majority  of  economists ;  and  those  who  have  contested  it  have 
probably  done  so  from  a  misunderstanding  of  its  true  import. 
Without  attempting  to  follow  Malthus  in  detail,  we  shall  pre- 
sent the  theory  of  population  in  as  clear  a  form  as  possible. 

44.  Let  us  suppose  that  every  married  pair  has  four  chil- 
dren who  grow  to  maturity,  marry,  and  have  four  more  chil- 
dren, and  so  on  indefinitely.     It  is  evident  and  certain  that 
in  such  a  case  the  population  would  double  with  every  genera- 


108          DESCRIPTION  OF  THE  SOCIAL  ORGANISM.       [II.  44. 

tion.  If  the  average  duration  of  the  generation  was  one  third 
of  a  century,  then  in  33£  years  the  population  would  be  mul- 
tiplied by  2,  in  66f  years  by  4,  in  100  years  by  8,  and  so  on. 

Continuing  the  process,  we  see  that  the  population  would  be 
multiplied  by  8  during  the  period  of  every  century.  That 
is,  it  would  increase  in  a  geometrical  ratio,  or  in  geometrical 
progression. 

The  ratio  of  this  progression  would  of  course  depend  upon 
the  average  number  of  children  in  each  family  who  grew  to 
maturity  and  married.  If  this  number  were  only  three  instead 
of  four,  then  the  population  would  only  increase  by  50  per 
cent  in  each  generation,  and  a  little  more  than  3£  times  in 
each  century.  That  is,  the  rate  of  increase  will  depend  on 
the  fertility  of  the  population.  It  is,  however,  evident  that  if 
all  the  conditions  remained  the  same,  generation  after  genera- 
tion ;  if  each  generation  had  precisely  the  same  degree  of  health, 
and  the  same  appetites  and  means  of  support  as  its  predecessors ; 
if  the  difficulty  of  supporting  a  family  did  not  in  any  manner 
change,  then  the  ra|;e  of  increase  would  always  be  in  the  same 
ratio ;  that  is,  the  numbers  of  the  population  at  any  equidistant 
periods  of  time  would  form  a  geometrical  progression.  This 
fact  was  expressed  by  Malthus  in  the  statement  that  population 
tends  to  increase  in  this  progression — a  statement  which  his 
opponents  frequently  misstated  by  assuming  it  to  mean  that 
population  does  actually  thus  increase  under  all  times  and  cir- 
cumstances. 

There  is  nothing  in  what  we  have  said  which  presupposes 
any  definite  rate  of  increase.  If,  instead  of  four  or  three,  only 
two  children  of  each  family  should  grow  to  maturity  and 
marry,  there  would  be  no  increase  at  all.  If  only  one,  the 
population  would  be  reduced  to  one  half  in  each  generation. 
But  the  law  would  still  be  that  of  geometrical  progression,  the 
only  difference  being  that  in  the  one  case  the  common  ratio  of 
the  progression  would  be  unity,  and  in  the  other  it  would  be 
less  than  unity. 

The  general  rule  is,  however,  that  as  men  are  actually  con- 


II.  45.]  THE  INCREASE  OF  POPULATION.  109 

stituted  the  ratio  will  be  considerably  greater  than  unity,  unless 
the  increase  of  population  is  kept  down  by  external  causes. 
Yet  apart  from  these  causes  different  races  and  classes  of  men 
show  very  different  degrees  in  the  tendency  to  increase. 

45.  It  will  conduce  to  clearness  if  we  begin  by  considering 
the  causes  which  tend  to  check  the  increase.  They  belong  to 
two  classes. 

Firstly,  moral  causes  acting  upon  the  individual  and  leading 
him  to  postpone  or  avoid  marriage. 

Secondly,  physical  causes  resulting  in  the  death  of  offspring. 

The  first  of  these  causes  is  probably  a  product  of  civilization. 
Savage  and  barbarous  tribes  propagate  almost  entirely  by  vir- 
tue of  an  animal  impulse,  and  without  consideration  of  what 
shall  become  of  the  creatures  who  owe  their  origin  to  that  im- 
pulse. This  is  true  not  only  in  the  lowest  states  of  society, 
but  frequently  among  the  lower  orders  of  some  civilized  socie- 
ties. The  lower  order  of  the  colored  population  in  the  United 
States  may  be  taken  as  a  case  in  point.  The  wants  of  this 
class  of  people  are  so  simple,  and,  in  our  countiy,  so  easily  sup- 
plied, that  the  problem  of  supporting  a  family  is  one  to  which 
little  consideration  is  given  in  contracting  the  marriage  rela- 
tion. This,  of  course,  is  due  also  to  the  improvident  character 
of  the  race.  Statistics  show  that  the  problem  of  supporting 
a  family  exerts  a  much  more  serious  restraint  upon  the  lower 
classes  in  European  countries,  who  before  they  marry  take 
into  consideration  the  necessity  of  supporting  children. 

As  we  ascend  the  social  scale  we  find  the  restraining  influ- 
ence to  increase,  and  to  reach  its  maximum  with  those  classes 
who  have  a  social  positidn  to  sustain  and  but  limited  means  to 
sustain  it.  The  wealthy  classes  in  all  countries,  being  above 
the  fear  of  want,  are  subject  to  no  moral  restraints  from  this 
source. 

Secondly,  when  moral  restraint  proves  an  insufficient  induce- 
ment to  the  keeping  down  of  increase,  then  want  and  disease 
step  in  and  do  the  work  by  carrying  off  those  children  who  are 


HO          DESCRIPTION  OF  THE  SOCIAL  ORGANISM.       [11.46. 

least  litted  to  cope  with  the  world.  Infant  mortality  attains 
its  maximum  among  the  lower  orders  of  men  and  the  crowded 
poor  of  great  cities,  and  is  at  its  minimum  among  the  classes 
who  are  able  to  supply  their  children  with  everything  neces- 
sary to  their  continued  existence. 

It  must  be  specially  remarked  that  these  two  causes  operate 
very  differently  among  different  classes  of  people.  The  first 
principally  affects  the  middle  intellectual  and  professional 
classes,  and  has  little  influence  upon  either  the  wealthy  or  the 
most  degraded  ones.  The  second  cause  operates  principally 
among  the  poor,  and  among  them  naturally  varies  inversely  as 
the  first  cause ;  in  other  words,  the  less  moral  restraint  the 
poor  impose  upon  themselves  the  greater  the  mortality  among 
their  children. 

Eliminating  the  two  causes  just  described,  we  shall  have  the 
measure  of  the  unrestrained  tendency  to  increase.  This,  as 
already  remarked,  is  very  different  among  different  people.  In 
France  it  is  so  small  that,  notwithstanding  the  small  amount 
of  emigration,  the  increase  of  population  is  very  slow.  The 
same  is  true  of  native  Americans.  Although  our  population 
has  very  generally  increased  by  nearly  30  per  cent  in  every 
decade,  it  would  seem  from  the  Census  reports  that  the  largest 
portion  of  that  increase  comes  from  immigration  or  from  for- 
eign-born parents.  The  state  of  things  thus  indicated  is  one 
most  worthy  the  attention  of  the  student  of  social  science. 

46.  This  conclusion  that  different  classes  of  men  tend  to 
increase  at  different  rates  gives  rise  to  one  of  the  most  impor- 
tant questions  affecting  the  future  of  our  race.  Enlightened 
men  now  recognize  the  fact  that  the  qualities  of  the  children 
born  into  the  world  are  determined  by  natural  causes.  In 
individual  cases  the  causes  entirely  elude  our  scrutiny;  but 
when  we  consider  general  averages  among  large  collections  of 
men,  we  have  open  to  us  a  very  fruitful  field  of  investigation. 
The  maxim  "Like  produces  like  "  is  found  to  be  an  approxima- 
tion to  the  truth  in  the  general  average  case.  For  example, 


II.  46.]  THE  INCREASE  OF  POPULATION.  HI 

statistics  show  that  vigorous  and  healthy  parents  have  a  larger 
proportion  of  vigorous  and  healthy  children  than  weak  and 
sickly  parents  do.  Talented  parents  have  a  larger  proportion 
of  talented  children  than  dull  parents  do.  Qualities  very  fre- 
quent in  certain  races  are  almost  unknown  among  others.  The 
laboring  classes  in  European  countries  rarely,  if  ever,  give  birth 
to  children  capable  of  rising  above  the  station  in  which  they 
are  born.  Certain  races  of  men  are  incapable  of  understand- 
ing the  methods  of  scientific  investigation.  The  student  of 
ethnology  finds  differences  among  men  who  to  the  ordinary  ob- 
server are  quite  alike  in  all  their  qualities.  The  success  of 
the  English  people  is  very  largely  due  to  a  common-sense  turn 
of  mind,  leading  them  to  look  upon  things  as  they  actually  are, 
and  to  govern  themselves  according!}',  instead  of  being  carried 
away  by  the  search  after  "  el  Dorados  "  and  Utopias  which  has 
been  the  curse  of  the  world. 

When  the  laws  of  descent  are  more  fully  investigated,  it  will 
probably  be  found  that  the  characters  of  children  depend  not 
only  upon  the  characters  of  the  parents,  but  upon  their  sur- 
roundings. It  may  possibly  be  found  that  when  a  race  is 
thrown  into  a  new  situation,  by  emigration  or  otherwise,  and 
its  members  thus  stimulated  to  new  activities  and  brought  into 
new  relations  to  the  world,  a  higher  average  of  talented  off- 
spring is  the  result.  The  establishment  of  such  laws  is,  how- 
ever, still  a  work  of  the  future,  and  until  they  are  established 
a  satisfactory  theory  of  population  is  out  of  the  question. 

The  economic  application  of  the  preceding  principles  arises 
in  this  way :  The  kind  of  labor  in  which  a  man  is  fitted  to 
engage  depends  very  largely  upon  the  qualities  with  which  he 
is  born.  We  may  trace  a  regular  gradation  in  the  orders  of 
labor,  from  the  work  of  the  da}--laborer,  which  is  at  the  bottom 
of  the  scale,  up  to  the  functions  of  the  great  administrator, 
ruler,  and  philosopher,  which  are  at  the  top.  The  higher  up 
we  go,  the  rarer  the  combination  of  natural  qualities  which  the 
work  requires,  and,  by  a  law  of  value  hereafter  to  be  laid  down, 
the  more  important  are  we  to  regard  the  work.  The  good  of 


112  DESCRIPTION  OF  TUB  SOCIAL  ORGANISM.       [II.  47. 

society  requires  that  the  number  of  people  who  are  born  ca- 
pable of  performing  each  separate  kind  of  labor  should  be 
approximately  proportional  to  the  number  required  for  its 
performance.  Measured  by  this  standard,  there  has  been  up 
to  the  present  time  a  comparative  scarcity  of  men  of  the 
higher  orders,  and  a  comparative  redundancy  of  men  of  the 
lower  orders.  The  question  whether  this  inequality  is  to  in- 
crease or  diminish  in  the  future  is  involved  in  the  law  of 
descent.  So  far  as  our  imperfect  knowledge  of  the  subject 
enables  us  to  see  into  it,  the  balance  of  evidence  seems  to 
threaten  a  continued  scarcity  of  the  higher  orders  of  men.  It 
would  seem  that  the  race,  in  this  country  at  least,  is  less  pro- 
lific the  higher  we  ascend  in  the  intellectual  and  social  scale. 
There  would  therefore  be  an  absolute  diminution  in  the  pro- 
portion of  men  capable  of  performing  the  higher  functions  of 
society,  were  it  not  that  such  men  are  born  to  a  greater  or  less 
extent  among  all  classes  of  society.  This  continual  replenish- 
ing of  the  higher  ranks  from  births  among  the  lower  ranks 
encourages  us  to  believe  that  the  former  will,  at  least  for  some 
time  to  come,  keep  their  relative  numbers ;  but  whether  these 
numbers  will  increase  in  the  proportion  that  philanthropists 
would  like  to  see  them  increase  is  still  an  open  one. 

47.  The  Malthusian  theory  of  population  is  so  frequently 
misapprehended  that  it  has  almost  become  a  by-word  among 
some  economic  thinkers.  It  is  proper,  therefore,  that  we 
should  see  clearly  in  what  it  consists.  It  applies  to  the  ques- 
tion of  an  increase  of  population  the  same  method  which  is  to 
be  applied  in  all  scientific  investigation ;  that  is,  it  considers  the 
causes  one  at  a  time,  commencing  with  the  most  general  ones. 
In  economics  the  most  general  causes  are  the  qualities  of 
human  nature,  because  these  are  found  among  all  men,  while 
other  causes  depend  upon  the  situation  in  which  men  are 
placed.  Now,  considering  only  the  tendency  of  the  race  to 
propagate,  and  making  abstraction  of  all  changes  in  its  condi- 
tion, it  is  unquestionably  true,  as  already  shown,  that  the  popu- 


II.  47.]          .      THE  INC11EASE  OF  POPULATION.  113 

lation  will  increase  in  a  geometrical  progression,  the  common 
ratio  of  which  will  depend  upon  the  disposition  to  propagate. 
This  common  ratio  is  greater  than  unity  among  almost  all  races. 
"We  might  almost  say  that  it  is  necessarily  greater  than  unity, 
because  if  less  than  unity  the  race  will  die  out  by  virtue  of  its 
own  inherent  tendencies.  Now  it  is  certain  that  the  number 
of  individuals  who  could  gain  a  subsistence  upon  the  surface  of 
the  earth  is  limited.  It  is  therefore  perfectly  certain  that  if  the 
tendency  to  propagate  should  act  without  any  restraining  influ- 
ence whatever,  the  ultimate  result  would  be  u  larger  popula- 
tion than  the  earth  could  support. 

So  much  has  been  proved  by  Malthus.  Those  who  misap- 
prehend the  theory  interpret  it  as  meaning  that  the  increasing 
numbers  will  be  kept  down  by  positive  starvation.  But  this 
does.not  follow  at  all.  We  have  already  shown  that  a  moral 
restraining  influence  is  always  at  work,  at  least  among  the  in- 
telligent classes.  To  say  that  a  time  may  come  when  the  whole 
race  cannot  find  adequate  subsistence  is  the  same  thing  as  say- 
ing that  certain  classes  of  men  will  not  be  able  to  support  large 
families.  Now  the  question  whether  a  man  will  or  will  not  be 
able  to  support  a  family  is  one  which  he  can  himself  decide  in 
advance.  Intelligent  people  reaching  a  decision  on  this  point 
will  govern  themselves  accordingly.  It  is  only  the  unintelli- 
gent and  reckless  classes  who  will  give  no  consideration  to  the 
subject.  The  only  question,  then,  which  can  remain  is  whether 
we  shall  always  have  a  reckless  class  of  this  kind  in  such  num- 
bers as  to  exceed  the  limits  imposed  by  the  conditions  of  sub- 
sistence. This  question  is  one  which  the  future  alone  can 
answer.  All  the  economists  of  the  present  time  can  do  is  to 
gain  a  clear  conception  of  the  various  causes  at  play,  and  then 
to  proceed  intelligently  in  the  investigation  of  the  laws  of 
descent. 

8 


114          DESCRIPTION  OF  THE  SOCIAL  ORGANISM.       HI.  48. 


CHAPTER  VIII. 

OF   FLUCTUATIONS   IN   ECONOMIC    PROCESSES. 

48.  IF  the  population  of  the  country  were  nearly  invaria- 
ble ;  if  each  individual  of  that  population  ate  the  same  quanti- 
ty of  each  kind  of  food  year  after  year  ;  if  he  wore  the  same 
kind  and  number  of  clothes:  if  there  were  no  change  of 

*  O 

fashions  in  life ;  if  no  improvements  were  made  in  the  mode  of 
supplying  wants,  then  there  would  be  no  great  fluctuations  in 
business.  Every  producer  would  know  beforehand  how  much 
of  his  product  would  be  demanded  by  the  community,  and  at 
what  price ;  he  could  make  his  calculations  and  employ  his  la- 
borers accordingly,  and  those  embarrassments  which  so  trouble 
the  whole  business  community  would  be  nearly  unknown.  As 
a  matter  of  fact,  however,  modern  improvements  in  organizing 
the  productive  capacities  of  society  have  introduced  fluctua- 
tions in  nearly  every  department  of  trade.  What  was  fashion- 
able last  year  in  Indies'  wear  is  not  fashionable  this  year ;  and 
what  is  now  fashionable  may  not  be  wanted  hereafter.  Thus 
manufacturers  and  dealers  arc  in  a  state  of  uncertainty  as  to 
what  product  they  should  make  in  order  to  meet  the  future 
demand,  and  have  to  run  the  risk  of  losing  money  by  making 
what  they  cannot  sell,  or  of  failing  to  gain  a  profit  by  not 
making  what  is  wanted.  If  every  producer  could  make  one 
thing  as  easily  as  another,  and  if  the  machinery  constructed 
for  one  purpose  could  be  applied  to  another,  the  drawbacks 
arising  from  this  cause  would  not  be  serious.  But  neither  the 
machinery  nor  the  operatives  of  a  great  factory  can  suddenly 
change  their  work  without  loss.  The  greater  part  of  the  ma- 
chinery of  almost  any  great  factory  would  be  nearly  worthless 
for  any  other  purpose.  Yet,  since  the  demand  does  change 
from  time  to  time,  it  is  essential  that,  so  far  as  possible,  many 


11.49.]      FLUCTUATIONS  IN  ECONOMIC  PROCESSES.  H5 

agencies  employed  in  production  shall  admit  of  being  adapted 
to  a  new  employment.  "We  have  to  consider  how  this  adapta- 
tion is  effected,  and  at  what  disadvantages.  We  begin  with 
changes  in  the  pursuits  of  men. 

49.  Changes  in  the  Direction  of  Labor.  It  is  sometimes 
assumed  that  there  is  no  power  of  adaptation  among  men,  and 
that  they  are  as  incapable  of  turning  to  new  employments  as 
the  machinery  in  the  factory  is  of  being  turned  to  new  uses. 
Of  course  this  is  a  subject  on  which  we  can  lay  down  no  uni- 
versal propositions,  because  the  case  differs  with  different  men 
and  with  different  employments.  The  inhabitants  of  some 
countries  have  much  more  versatility  than  those  of  others. 
Americans  are  supposed  to  possess  this  quality  in  a  high  de- 
gree, and  are,  among  all  people,  those  who  are  best  able  to 
change  their  occupation  in  obedience  to  a  change  of  demand. 
The  watchmakers  of  Switzerland  and  the  spinners  of  Man- 
chester approach  the  other  extreme,  in  being  able  to  do  little 
but  what  they  have  been  taught  to  do.  Again,  adaptability 
varies  with  the  nature  of  the  employment.  As  a  general  rule 
education  increases  this  quality,  while  a  lifetime  of  training  in 
a  specialty  diminishes  it.  A  professor  of  one  science  can  com- 
monly teach  another,  and  a  merchant  who  is  successful  in  one 
kind  of  trade  can  generally  change  to  another.  On  the  other 
hand,  the  cases  in  which  mechanics  can  change  their  occupa- 
tion without  disadvantage,  though  not  rare,  are  exceptional, 
and  more  exceptional  as  the  occupation  is  specialized. 

"We  have  now  to  show  that  although  men  may  not  be  able 
to  change  indifferently  from  one  occupation  to  another,  yet, 
indirectly,  industry  may  be  diverted  from  one  occupation  to 
another  without  serious  disadvantage.  We  may  place  the  ques- 
tion in  the  following  shape :  From  the  fact  that  a  shoemaker 
cannot  make  clothes  does  it  follow  that,  in  case  fewer  shoes  and 
more  clothes  should  be  required,  the  producers  of  shoes  and 
clothes  cannot  adapt  their  production  to  the  new  state  of 
things?  The  answer  is,  it  does  not  so  follow.  Productive 


116          DESCRIPTION  OF  TJJE  SOCIAL   ORGANISM.       [11.49. 

industry  may  be  changed  from  one  channel  to  another  without 
individual  men  changing  their  occupation  directly  from  one  to 
the  other.  The  change  may  be  effected  in  two  ways,  which 
we  shall  illustrate  by  showing  how  a  certain  amount  of  industry 
could  be  changed  from  the  occupation  of  making  shoes  to  that 
of  making  clothes. 

It  must  first  be  remembered  that,  from  various  causes,  men 
are  continually  leaving  each  occupation  and  new  ones  are  tak- 
ing their  places.  They  are  leaving  in  consequence  of  death, 
of  old  age,  of  inability  from  various  causes,  as  well  as  from 
change  of  occupation.  If  no  new  hands  should  engage  in  the 
work  of  making  shoes  during  the  next  ten  years,  it  is  highly 
probable  that  the  number  of  persons  engaged  in  the  occupation 
would  be  reduced  to  one  half  through  the  causes  just  cited. 
This  may  even  be  an  under-estimate ;  it  is  not  unlikely  that  from 
ten  to  twenty  per  cent  leave  the  occupation  every  year.  Now, 
there  are  few  if  any  commodities  the  want  of  which  by  the 
community  can  fall  off  permanently  in  a  more  rapid  ratio  than 
this.  Hence  diminished  demand  for  any  one  commodity  may 
be  completely  responded  to  by  no  new  producer  undertaking 
the  work  of  producing  that  commodity. 

Conversely,  it  is  readily  seen  that  an  increase  in  the  produc- 
tion of  clothes  can  be  brought  about  by  a  corresponding  increase 
in  the  number  of  young  men  and  women  who  learn  to  make 
clothes.  Thus  we  have  industry  changed  from  shoemaking  to 
clothes-making,  not  by  individuals  passing  from  one  occupation 
to  the  other,  but  simply  by  having  those  young  men  who  would 
have  joined  the  ranks  of  shoemakers  change  their  purpose  and 
join  the  ranks  of  tailors. 

The  other  method  of  making  the'  transfer  is  also  an  indirect 
one.  Let  there  be  an  increased  demand  for  clothes  and  a 
diminished  demand  for  shoes.  It  will  be  found  that  a  certain 
number  of  persons  now  engaged  in  miscellaneous  occupa- 
tions can  forsake  those  occupations  and  become  tailors.  Per- 
haps they  were  once  tailors.  Let  the  occupations  they  leave 
be  A,  B,  and  C.  Then  we  shall  have  occupations  A,  B,  and 


II.  50.]      FLUCTUATIONS  IN  ECONOMIC  PROCESSES.  117 

C  requiring  additional  laborers  to  fill  the  vacancies  thus 
arising.  Some  of  these  vacant  places  may  be  filled  by  the 
shoemakers.  If  the  shoemakers  themselves  cannot  fill  them, 
other  people  can  do  so  whose  places  the  shoemakers  can  take. 
There  may  be  a  chain  of  any  length,  occupation  Z  being  sup- 
plied from  occupation  Y,  occupation  Y  from  occupation  X, 
and  so  on,  until  we  find  one  which  is  supplied  by  the  unem- 
ployed shoemakers.  Now  since  in  all  these  operations  the 
number  of  people  engaged  in  these  intermediate  occupations 
has  remained  unchanged,  while  there  has  been  an  increase  of 
tailors  and  a  diminution  of  shoemakers,  the  result  is  the  same 
as  if  a  certain  number  of  shoemakers  had  changed  their  occu- 
pation to  that  of  making  clothes.  We  mny  therefore  assume 
that  it  is  possible  for  industry  to  change  from  one  occupation  to 
another  in  response  to  the  fluctuations  of  demand,  and  that  this 
will  result  in  the  same  way  as  if  every  producer  could  change 
from  one  occupation  to  another  at  pleasure. 

5O.  Competing  and  Non-competing  Groups.  Are  we  to 
assume  that  there  is  no  limit  to  the  changes  which  may  thus  be 
made  in  the  industry  of  a  country?  Can  every  occupation  be 
indirectly  recruited  from  the  ranks  of  those  engaged  in  any  and 
every  other  occupation?  It  is  evident  that  we  cannot  answer 
this  question  absolutely  in  the  affirmative.  It  is  certain  that  an 
increased  demand  for  college  professors  and  railway  directors 
cannot,  even  indirectly,  be  immediately  responded  to  from  the 
ranks  of  day-laborers.  On  the  other  hand,  it  is  equally  difficult 
to  lay  down  an  absolute  line  and  say  that  no  person  from  below 
this  line  can  step  above  it.  "We  must  admit  that  an  increased 
demand  for  college  professors  could  be  partly  met  by  promot- 
ing teachers  of  high-schools ;  the  places  of  the  latter  could  be 
filled  by  teachers  now  of  a  lower  order,  and  these  places  again 
might  be  filled  by  men  in  various  ranks  of  life  who  possess  the 
art  of  teaching ;  their  places  by  men  of  a  lower  order,  and  so 
on ;  so  that  it  is  difficult  to  say  just  where  the  limit  would  be 
found. 


118          DESCRIPTION  OF  TUB  SOCIAL  ORGANISM.       [II.  50. 

If,  however,  we  go  in  the  opposite  direction,  we  shall  find 
limits  which,  though  not  absolute,  cannot  be  far  overstepped. 
As  a  general  rule  it  will  be  impossible  for  the  class  of  un- 
skilled laborers  to  engage  in  any  occupation  requiring  skill, 
how  great  soever  may  be  the  demand.  The  very  fact  that 
they  are  unskilled  laborers  shows  that  they  do  not  possess  the 
qualities  necessary  to  fill  higher  places.  The  latter  command 
higher  wages  ;  and  the  fact  that  they  are  unable  to  command 
these  wages  shows  that  the  defect  is  inherent  in  their  constitu- 
tion, and  cannot  be  overcome,  how  great  soever  the  induce- 
ment offered.  They  can  change  from  one  unskilled  occupa- 
tion to  another :  ploughing,  tending  horses  and  cattle,  digging 
streets,  planting,  driving  carts,  and  carrying  hods  are  all  open 
to  them.  In  fact,  it  might  be  considered  that  the  range  of 
their  possible  occupations  is  wider  than  in  the  case  of  any  other 
class,  since  there  is  no  limit  to  the  number  of  little  things 
which  a  community  would  like  to  have  done  to  promote  its 
pleasure.  Every  owner  of  an  acre  lot  would  like  to  see  it  cul- 
tivated and  planted  with  flowers ;  improved  streets  are  needed 
in  every  city ;  with  every  increase  of  population  more  labor 
must  be  devoted  to  cultivating  the  ground.  The  result  is  that 
the  demand  for  unskilled  labor,  although  in  one  sense  not  large, 
yet  in  another  sense  is  unlimited ;  and  it  is  not  an  exaggeration 
to  say  that  the  unskilled  laborer  has  more  employments  open 
to  him  in  his  grade  than  any  other  member  of  the  community. 

Skilled  labor  may  be  defined  as  that  which  requires  a  longer 
or  shorter  course  of  training  in  the  use  of  the  eye  and  the 
hand,  but  which  does  not  require  any  training  of  the  intellect. 
Since  intellectual  labor  is  generally  more  agreeable  and  better 
paid  than  skilled  manual  labor,  it  may  be  generally  assumed 
that  those  who  engage  in  the  latter  are  incapable  of  the  former. 
Yet  the  line  is  not  at  all  impassable.  The  most  we  can  say  is 
that  only  a  small  minority  can  pass  it.  Moreover,  skilled  labor- 
ers are  those  who  find  it  most  difficult  to  pass  from  one  occu- 
pation within  their  plane  to  another.  The  case  of  vacancies  in 
the  ranks  of  tailors  beins:  filled  from  the  class  of  shoemakers  is 


II.  50.]       FLUCTUATIONS  IN  ECONOMIC  PROCESSES.  H9 

an  extreme  one.  It  is  much  easier  for  either  the  day-laborer 
or  an  educated  man  to  pass  from  one  occupation  to  another 
than  it  is  for  a  skilled  laborer  to  do  so. 

The  class  of  intellectual  laborers,  or  those  engaged  in  occu- 
pations requiring  a  high  degree  of  education,  can  generally 
change  their  occupation  upon  their  own  plane  without  difficul- 
ty. But  even  here  all  occupations  are  not  open  to  all  edu- 
cated men.  An  increased  demand  for  eminent  lawyers,  skilful 
surgeons,  and  eloquent  preachers  cannot  be  responded  to  by 
any  great  increase  in  the  number  of  those  who  can  perform 
such  functions.  The  response  comes  in  the  shape  of  increased 
prices  for  their  services. 

There  is  a  grade  which  may  be  economically  considered  as 
yet  higher,  with  which  no  competition  from  the  lower  grades  is 
possible.  It  is  that  of  the  great  organizers  and  administrators 
who  manage  the  business  affairs  of  the  country.  An  increased 
demand  for  railway  presidents  can  with  difficulty  be  met.  The 
number  of  people  who  can  successfully  carry  on  the  operations 
of  a  great  factory  is  very  small.  Correct  judgment  of  demand 
or  supply  in  the  market  cannot  be  bought  for  money.  No 
amount  of  training  can  make  a  great  novelist  without  natural 
qualities  to  begin  with. 

The  idea  of  dividing  the  industrial  population  into  non- 
competing  groups  was  first  worked  out  by  Mr.  Cairnes.  He 
supposed  a  division  into  four  groups  instead  of  three  as  is  sup- 
posed above.  "  First,  at  the  bottom  of  the  scale  there  would 
be  the  large  group  of  unskilled  or  nearly  unskilled  laborers, 
comprising  agricultural  laborers,  laborers  engaged  in  miscella- 
neous occupations  in  towns,  or  acting  in  attendance  on  skilled 
labor.  Secondly,  there  would  be  the  artisan  group,  comprising 
skilled  laborers  of  the  secondary  order — carpenters,  joiners, 
smiths,  masons,  shoemakers,  tailors,  hatters,  etc.,  with  whom 
might  be  included  the  very  large  class  of  small  retail  dealers 
whose  means  and  position  place  them  within  the  reach  of  the 
same  industrial  opportunities  as  the  elass  of  artisans.  The  third 
layer  would  contain  producers  and  dealers  of  a  higher  order, 


120          DESCRIPTION  OF  THE  SOCIAL  ORGANISM.       [II.  50. 

whose  work  would  demand  qualifications  only  obtainable  by 
persons  of  substantial  means  and  fair  educational  opportunities 
— for  example,  civil  and  mechanical  engineers,  chemists,  opti- 
cians, watchmakers,  and  others  of  the  same  industrial  grade,  in 
which  might  also  find  a  place  the  superior  class  of  retail  trades- 
men ;  while  above  these  there  would  be  a  fourth,  comprising 
persons  still  more  favorably  circumstanced,  whose  ample  means 
would  give  them  a  still  wider  choice.  This  last  group  would 
contain  members  of  the  learned  professions,  as  well  as  persons 
eno-a<jed  in  the  various  careers  of  science  and  art,  and  in  the 

O    O  ' 

higher  branches  of  mercantile  business." 

It  is  not  possible,  however,  to  assign  any  definite  number  to 
these  groups;  indeed  the  term  group  is  used  to  facilitate  the 
thought  rather  than  to  express  the  fact.  The  difference  be- 
tween men  is  one  of  degree  and  not  of  kind,  the  main  fact  being 
that  each  employment  is  open  only  to  a  limited  class,  and  that 
the  higher  the  employment  the  more  limited  is  the  class  which 
can  engage  in  it. 

The  conclusions  hereafter  to  be  drawn  from  this  grouping 
of  men  are  of  the  utmost  importance  in  estimating  the 
effect  of  changes  in  production  upon  the  welfare  of  the 
different  classes  of  society.  All  such  changes  are  produc- 
tive of  increased  demand  for  some  kinds  of  services  and 
diminished  demand  for  other  kinds.  If  these  variations 
of  demand  can  be  met  by  corresponding  changes  of  occu- 
pation, either  directly  or  indirectly,  in  the  ways  pointed 
out,  the  equilibrium  will  be  kept  up.  If  they  cannot  be  so 
met,  there  will  be  a  disturbance  of  the  equilibrium,  to  be  re- 
stored only  by  a  different  scale  of  relative  wages ;  one  class 
commanding  more,  and  another  less,  after  the  change.  To 
foresee  the  effect  of  these  changes  we  must  refer  principally 
to  the  past  to  see  what  their  effect  actually  has  been.  In 
special  cases,  however,  the  principles  above  laid  down  will 
generally  enable  us  to  reach  a  fairly  definite  conclusion. 


II.  51.]      FLUCTUATIONS  IN  ECONOMIC  PROCESSES.  121 

51.  Transformdbility  of  Capital.  Capital  admits  of  be- 
ing changed  from  one  form  to  another,  as  labor  admits  of  be- 
ing employed  in  one  direction  or  another.  The  transforma- 
tion cannot  be  made  so  speedily  as  the  transfer  of  labor ;  but, 
if  we  take  time  enough,  there  is  no  limit  to  its  extent,  as 
there  is  in  the  case  of  labor.  A  cotton  factory  can  be  changed 
into  an  iron  ship  with  more  economy  than  a  hod-carrier  can 
be  turned  into  a  lawyer.  It  is  true  that  the  transformation  of 
capital  necessarily  involves  a  change  in  the  direction  of  labor, 
but  this  change  is  mostly  from  one  employment  to  another  of 
the  same  order,  and  can  be  effected  in  the  way  just  pointed 
out. 

When  we  speak  of  such  a  transformation  as  that  of  a  fac- 
tory into  a  ship,  we  of  course  use  the  word  in  a  different 
sense  from  that  employed  when  we  speak  of  transforming 
wool  into  cloth.  To  effect  the  transformation  it  is  not  neces- 
sary that  any  portion  of  the  factory  should  be  used  in  the  ship ; 
the  result  is  brought  about  through  changing  the  direction  of 
labor  from  the  work  of  keeping  up  the  factory  to  the  work  of 
building  the  ship.  The  possibility  of  this  being  done  without 
a  total  loss  of  all  the  valu6  invested  in  the  factory  arises  from 
the  fact  that  the  latter  is  continually  wearing  out,  or,  as  already 
shown  (§  14),  capital,  like  every  other  kind  of  wealth,  is  un- 
dergoing a  constant  process  of  consumption.  The  consump- 
tion of  wealth  which  is  capital  differs  from  that  of  tvealth 
which  is  not  capital,  or  unproductive  consumption,  in  this: 
that  the  value  consumed  is,  in  the  case  of  productive  consump- 
tion, reproduced  under  a  new  form  and  in  increased  amount, 
while  in  unproductive  consumption  we  have  nothing  to  show 
for  the  thing  consumed  except  the  benefits  rendered  to  the 
consumer.  Since  the  value  remains  unconsumed  however  the 
capital  may  be  transformed,  it  has  the  permanence  of  an  in- 
vested fund.  Thus,  a  man  who  has  saved  a  sum  of  money  may 
have  it  to-day  in  the  form  of  wool,  to-morrow  in  the  form  of 
cloth,  and  the  day  after,  through  selling  the  cloth  and  buying 
boots,  he  may  have  it  in  the  form  of  boots.  His  fund  will 


122  DESCRIPTION  OF  THE  SOCIAL  ORGANISM.       [II.  51. 

have  remained  unaltered,  notwithstanding  the  variety  of  forms 
•which  the  wealth  represented  by  it  has  undergone. 

Fixed  capital  is  being  consumed,  as  well  as  circulating  capi- 
tal. The  rates  of  consumption  are,  however,  very  different  in 
different  cases.  Great  public  buildings  may  last  for  centuries. 
A  canal,  if  kept  in  repair,  will  last  as  long  as  the  geological 
conditions  of  the  country  through  which  it  passes  remain  un- 
altered. The  buildings  of  a  factory  will  probably  be  nearly 
worn  out  in  the  course  of  one  generation,  and  its  machinery  in 
a  few  years.  Thus,  in  order  to  keep  up  the  fixed  value  of  all 
the  cotton  factories  of  a  state,  it  is  necessary  to  continually 
spend  labor  in  repairing  all  of  them,  and  in  rebuilding  those 
which  get  worn  out. 

Suppose,  now,  that  the  business  of  manufacturing  cotton  be- 
comes unrernunerative,  while  that  of  trade  with  foreign  coun- 
tries becomes  remunerative.  Since  trading  requires  ships,  the 
prosecution  of  this  remunerative  business  will  require  the 
building  of  ships.  Let  us  imagine  that  ten  manufacturers 
have  each  been  devoting  $5000  per  annum  to  repairing  and 
keeping  up  the  machinery  and  buildings  of  their  factories,  and 
that  without  such  repairs  the  machinery  would  be  worn  out 
in  ten  years.  They  may  then  say :  "  It  is  no  longer  profitable 
to  spend  money  in  keeping  up  our  machinery  and  our  build- 
ings ;  we  had  better  devote  the  sum  which  we  have  been 
spending  in  this  way  to  the  building  of  ships."  If  ships  cost- 
ing $50,000  each  were  the  most  profitable,  the  manufacturers 
could,  with  the  money  thus  withdrawn,  build  one  ship  a  year. 
This  would  require  a  diversion  of  labor  from  the  work  of  re- 
pairing factories  and  machinery  to  that  of  ship-building.  These 
two  kinds  of  labor  being  of  the  same  order,  the  change  could 
be  effected  without  any  great  economic  disadvantage.  The 
result  would  be  that  at  the  end  of  ten  years  the  value  of  the 
factories  would  all  have  disappeared,  and  in  its  place  would 
have  appeared  ten  ships.  During  the  whole  process  of  change 
we  conceive  that  the  capital  of  the  manufacturers  remains  un- 
altered, the  diminution  of  one  kind  keeping  pace  with  the  in- 


11.52.]      FLUCTUATIONS  IN  ECONOMIC  PROCESSES.  123 

crease  of  the  other  kind,  but  the  practical  result  would  be  that 
their  factories  would  have  been  transformed  into  ships. 

This  particular  example  of  transformation  is  perhaps  the 
most  difficult  and  troublesome,  and  we  have  selected  it  as  an 
extreme  case.  The  proposition  we  wish  to  enforce  is  that  cap- 
ital may  change  its  form  to  correspond  to  any  change  in  the 
direction  of  industry,  provided  due  time  be  given  to  effect  the 
transformation.  In  ordinary  cases  the  transformation  can  be 
effected  simply  by  no  new  capital  being  invested  in  the  less 
profitable  enterprises.  In  a  growing  country  new  factories  are 
constantly  being  built  and  new  enterprises  undertaken.  If  any 
manufacture,  that  of  cotton,  for  example,  becomes  unprofit- 
able, it  is  certain  that  by  erecting  no  new  buildings  or  ma- 
chinery for  tin's  manufacture,  the  proportionate  amount  of 
capital  invested  in  it  will  diminish  through  the  new  invest- 
ments of  capital  being  diverted  to  other  enterprises. 

52.  Inequalities  in  Economic  Processes.  The  inequali- 
ties described  in  the  preceding  section  are  those  which  arise 
from  changes  in  the  demand  for  products,  some  being  in  de- 
mand at  one  time,  and  others  at  another  time.  But  there  are 
also  fluctuations  which  do  not  arise  from  this  cause  alone,  but 
which  are  unavoidable  under  almost  any  circumstances.  To 
understand  them,  let  us  begin  by  imagining  all  the  opera- 
tions of  production,  exchange,  and  consumption  to  be  going 
on  with  perfect  regularity.  "We  have  first  to  show  that  under 
fixed  conditions,  that  is  to  say,  on  condition  that  the  quantity 
of  every  commodity  produced  and  consumed  remains  un- 
changed, the  transaction  of  a  certain  fixed  amount  of  business 
is  then  necessary.  If  we  trace  the  processes  of  manufacture, 
we  shall  find  that  the  number  of  exchanges  which  have  to  be 
made  are  dependent  upon  the  circumstances  of  the  case ;  that 
to  increase  them  will  cause  unnecessary  waste,  and  that  they 
cannot  be  diminished  without  the  efficiency  of  the  processes 
being  impaired. 

Take  for  example  our  old  case  of  the  coat.     The  farmer  who 


124          DESCRIPTION  OF  THE  SOCIAL  ORGANISM.       [II.  52. 

shears  his  sheep  has  very  little  knowledge  of  the  location  of 
the  various  factories  for  making  wool  into  cloth.  He  cannot, 
therefore,  sell  directly  to  the  manufacturers  without  running 
the  risk  of  failure  in  finding  the  best  market.  Quite  possibly 
lie  does  not  even  know  how  or  where  he  ought  to  send  his 
wool.  He  therefore  sells  to  some  jobber  whose  business  it  is 
to  know  where  wool  is  demanded  and  at  what  price.  This  is 
the  first  necessary  exchange.  If  this  jobber  is  himself  ac- 
quainted with  the  wants  of  all  the  factories,  or  if  the  managers 
of  the  latter  know  where  to  find  him,  he  will  sell  to  them, 
making  another  exchange.  It  may,  however,  happen  that  a 
second  exchange  or  even  a  third  is  necessary.  There  may  be 
one  dealer  between  the  jobbers  in  the  great  central  markets 
and  the  farmer,  and  there  may  be  another  between  the  jobbers 
and  the  manufacturer.  Whether  there  shall  or  shall  not  be 
such  "middlemen"  is  a  matter  depending  upon  the  knowledge 
of  the  course  of  trade  possessed  by  the  various  parties  con- 
cerned, especially  by  the  manufacturer  and  the  farmer.  This 
knowledge  is  one  of  the  conditions  which  we  suppose  to  remain 
unaltered,  and  thus  the  number  of  exchanges  necessary  for  the 
most  advantageous  transfer  of  the  wool  from  the  farmer  to  th<3 
manufacturer  are  fixed. 

When  the  manufacturer  makes  the  wool  into  cloth  he  finds 
it  more  convenient  to  sell  to  cloth  dealers  than  to  the  tailors 
who  make  it  into  cloth.  One  reason  of  this  is  that  each  tailor 
wants  a  great  many  kinds  of  cloth,  coming  from  numerous 
manufacturers,  while  the  products  of  each  factory  have  to  be 
divided  among  innumerable  tailors.  If  then  every  tailor  had 
to  get  each  kind  of  cloth  directly  from  the  factory  where  it 
was  produced,  there  would  be  a  very  troublesome  number  of 
transactions.  So  wholesale  jobbing  houses  are  established  to 
purchase  various  kinds  of  cloth  and  sell  it  to  tailors  and  other 
manufacturers  of  clothing.  Quite  possibly  great  manufacturers 
of  clothing  may  find  it  to  their  interest  to  buy  directly  from 
the  factory.  Whether  this  be  so  depends  upon  their  knowl- 
edge and  upon  the  conveniences  of  business,  and  not  upon  the 
state  of  trade. 


11.52.]       FLUCTUATIONS  IN  ECONOMIC  PROCESSES.          125 

What  is  true  of  the  making  of  wool  into  a. coat  is  true  of 
everything  we  wear  or  use  about  our  houses.  So  as  long  as 
our  means  and  our  wants  remain  unchanged  the  population  at 
large  requires  annually  a  certain  definite  number  of  suits  of 
clothes,  a  certain  number  of  houses,  a  certain  number  of  loaves 
of  bread,  a  certain  quantity  of  beef  and  pork,  and  a  certain 
supply  of  furniture.  If  every  one  supplied  himself  with  these 
commodities  at  a  uniform  rate,  or  even  if  the  rate  were  uniform 
for  the  general  average  of  the  community,  then  there  would  be 
no  disturbance  in  the  course  of  trade.  The  quantity  of  goods 
of  every  kind  which  every  dealer  could  sell  would  be  nearly 
the  same  month  after  month  and  year  after  year.  Demand 
would  change  only  with  new  sources  of  supply  or  new  uses  for 
commodities. 

But  the  more  rapidly  society  progresses  the  less  is  any 
such  uniformity  possible.  The  disturbances  come  from  both 
ends  of  the  line:  from  the  consumer  and  from  the  producer. 
Some  cause  mny  lead  a  large  body  of  the  community  to  econo- 
mize in  the  use  of  clothing.  Then  there  will  be  a  stagnation 
in  all  the  operations  of  making  and  selling  clothing,  or  of 
doing  anything  which  is  necessary  for  that  purpose.  When 
the  occasion  for  such  economy  arises  it  is  generally  practised 
upon  all  articles  of  current  consumption.  When  this  is  the 
case  business  generally  is  said  to  be  dull.  If  some  cheap  sub- 
stitute for  a  commodity  be  found  by  producers,  then  all  busi- 
ness which  consists  in  exchanging  that  commodity  will  be  dull. 
Competitors  capable  of  producing  cheaper  goods  engage  in 
production  and  lead  to  the  old  producers  being  no  longer  able 
to  find  a  market  without  lowering  their  prices.  They  are  per- 
haps driven  out  of  business,  and  thus  another  perturbation 
occurs  through  trade  having  to  find  new  persons  for  its  mana- 
gers. The  conception  which  has  now  to  be  formed  is  this : 

Firstly,  we  are  to  imagine  a  regular  stream  of  commodities 
going  through  the  various  processes  of  production  and  con- 
sumption. The  stream  of  wool  passes  from  the  prairies  over 
certain  railways,  through  certain  warehouses  and  factories,  and 


126          DESCRIPTION  OF  THE  SOCIAL  ORGANISM.       [II.  52. 

terminates  in  the  form  of  clothing.  The  stream  of  logs  is 
flowing  from  our  northern  forest  down  the  Mississippi  and 
other  rivers,  through  saw-mills,  over  railways,  and  into  our 
houses.  A  stream  of  cotton  is  passing  from  various  points  in 
the  Southern  States,  flowing  into  ships  and  there  dividing,  one 
portion  crossing  the  Atlantic  and  another  portion  finding  its 
way  to  New  England  factories.  A  stream  of  wheat  has  its 
origin  at  various  points  in  a  large  extent  of  country,  flows 
over  certain  railways  and  into  certain  cities,  passing  into  flour- 
ing-mills,  flows  from  them  over  other  railways  into  bakers' 
shops  and  into  our  houses,  where  it  ends  in  bread.  Streams  of 
pork  are  going  over  nearly  the  same  routes.  A  stream  of  hides 
is  flowing  out  of  Texas  towards  our  Northern  States. 

o 

Secondly,  we  can  imagine  a  regular  and  normal  state  of 
things  so  that  all  the  streams  would  flow  out  at  a  constant  and 
uniform  rate.  Then  the  exchanges  which  they  imply  would 
be  definite  in  number,  and  would  be  invariable  except  as  popu- 
lation, production,  and  consumption  increased  at  their  regular 
rate. 

Thirdly,  as  a  matter  of  fact  they  do  not  flow  at  a  regular  rate, 
but  rather  in  a  series  of  waves.  Of  course  an  annual  wave 
in  most  original  productions  of  the  soil  is  unavoidable,  since 
we  have  a  wheat-crop  and  a  wool-crop  but  once  a  year,  and 
each  at  a  particular  season.  But  these  annual  waves  are  soon 
smoothed  off.  Other  waves  rise  from  changes  in  the  foreign 
demand.  All  these  fluctuations  are  a  necessary  incident  of 
economic  operations,  and  do  not  imply  anything  abnormal  in 
the  conduct  of  society. 


II.  53.]  THE  COMMUNISTIC  POINT  OF  VIEW.  127 


CHAPTER  IX. 

PRODUCTION   AND   CONSUMPTION    FROM   A   COMMUNISTIC    POINT   OF 

VIEW. 

53.  BY  a  communistic  view  of  economic  processes  we  mean 
a  view  which  includes  only  the  processes  themselves  in  their 
relations  to  the  community  at  large,  considered  as  a  co-opera- 
tive body,  and  leaves  out  of  consideration  those  associated 
features  which  do  not  constitute  essential  parts  of  the  process. 
The  reason  for  this  view  is  that  the  associated  features  alluded 
to  confuse  our  thought,  and  stand  in  the  way  of  our  seeing  the 
essential  conditions  of  the  problem. 

Let  us  see  what  are  the  conditions  essential  to  the  enjoyment 
of  a  coat.  They  are  the  labor  devoted  to  the  production  and 
transportation  of  the  various  materials  of  which  the  coat  was 
made,  their  combination  into  a  coat,  the  transportation  of  the 
coat  to  some  point  within  easy  reach  of  the  wearer,  and  the  act 
of  the  latter  in  going  to  that  point  and  getting  the  coat.  I  say 
these  operations  are  the  essential  ones.  For  it  is  certain  that  that 
coat  could  not  have  been  enjoyed  by  the  wearer  without  these 
processes.  And  it  is  equally  certain  that  if  these  processes  are 
all  performed,  he  will  have  the  coat.  Now,  that  without  which 
a  result  will  certainly  not  be,  and  with  which  it  certainly  will 
be1,  is,  in  the  highest  degree,  the  essential  condition  of  the  result. 

Besides  these  essential  operations  by  which  the  coat  was  pro- 
duced and  placed  in  possession  of  the  wearer,  there  have  been 
certain  acts  of  another  kind.  These  acts  have  consisted  in  a 
certain  number  of  persons  in  succession  each  calling  the  wool 
"  my  property"  and  receiving  money  from  the  following  per- 
son in  exchange  for  the  right  on  his  part  to  call  the  wool  his 
property,  and  so  with  the  various  materials,  and  with  the 
finished  coat,  which  the  wearer  had  to  pay  money  for.  Now, 


128          DESCRIPTION  OF  THE  SOCIAL  ORGANISM.        [II.  54. 

these  acts  of  exchanging  the  right  of  ownership,  however  nec- 
essary they  may  be  (and  they  are  absolutely  necessaiy  as  society 
and  human  nature  are  constituted),  are  not  parts  of  those  opera- 
tions of  production  and  transformation  which  we  have  shown 
to  be  essential.  The  fact  that  we  cannot  get  along  without 
ownership  and  exchange  in  no  manner  modifies  the  fact  that  if 
the  thousands  of  producers  unite  in  performing  all  the  opera- 
tions necessary  to  making  the  coat  and  putting  it  into  your 
possession,  you  will  have  it,  and  if  they  do  not  you  will  not 
have  it.  Now,  our  object  in  the  present  chapter  is  to  leave  out 
of  consideration  the  processes  of  exchange  and  the  rights  of 
ownership,  in  order  to  show  what  necessary  relations  exist 
between  the  producing  operations  and  the  enjoyment  of  com- 
modities. We  call  this  view  communistic,  because  the  word 
communism  is  used  to  designate  a  system  in  which  the  private 
ownership  of  property  is  not  recognized.  We  view  economic 
conditions  from  this  standpoint  because  it  affords  us  the  basis 
of  solving  a  number  of  economic  problems  in  an  easy  and  sim- 
ple manner  which  otherwise  would  be  very  complex. 

54.  We  suppose  it  evident  to  the  reader  that  the  popula- 
tion of  the  country  comprises  some  fifteen  millions  of  laboring 
units,  heads  or  members  of  families,  who  are  producing  com- 
modities for  the  benefit  of  others.  Farmers  are  producing 
wheat  and  corn  ;  millers  are  producing  flour ;  carpenters  and 
bricklayers  are  producing  houses  ;  actors  are  producing  amuse- 
ment; tailors  are  producing  clothing.  If  we  add  up  all  the 
bread,  all  the  clothing,  all  the  amusements,  all  the  houses,  we 
shall  have  in  each  case  a  certain  sum  total  representing  the  en- 
tire production  of  each  separate  commodity  by  the  whole  com- 
munity. 

In  return  for  his  contributions  to  this  sum  total,  each  pro- 
ducer is  getting  a  larger  or  smaller  share  of  other  sums  total  for 
his  own  use.  By  the  process  of  exchange  he  gets  small  quanti- 
ties of  a  large  number  of  commodities  in  exchange  for  a  con- 
siderable quantity  of  some  one  commodity  which  he  himself 


II.  54.]  THE  COMMUNISTIC  POINT  OF  VIEW.  129 

has  produced.  His  -welfare  depends  on  how  much  of  these 
separate  commodities  his  labor  will  enable  him  to  command. 
The  more  he  puts  in  the  better  for  the  others,  and  the  more 
they  put  in  the  better  the  chance  for  him  to  be  supplied. 

To  fix  the  ideas,  let  us  suppose  that  all  these  things  produced 
are  brought  together  into  one  central  reservoir.  "We  employ 
this  conception  merely  to  enable  us  to  think  of  them  as  wholes 
rather  than  as  scattered  masses  of  parts.  Then,  every  com- 
modity which  is  brought  into  the  reservoir  will  be  brought 
in  by  some  person  or  body  of  persons,  everything  will  be 
taken  out  by  somebody,  and  every  commodity  which  is  taken 
out  will  be  consumed  by  some  person  or  family.  It  is  cer- 
tain that  nothing  can  be  taken  out  except  what  has  been 
put  in. 

An  apparent  difficulty  may  arise  in  making  this  conception 
correspond  to  the  actual  case.  If  we  add  up  all  the  quantities 
of  everything  actually  produced,  we  find  that  the  greater  part 
are  taken  out,  not  for  the  consumption  of  the  individual  who 
takes  them,  but  for  the  purpose  of  being  worked  up  by  him 
and  brought  back  to  the  reservoir  in  an  improved  form.  For 
example,  the  wool  which  the  drover  throws  into  the  reservoir 
is  taken  by  the  manufacturer,  not  to  be  consumed  by  himself, 
but  to  be  made  up  into  cloth.  The  tailors  take  the  cloth  out 
of  the  reservoir  in  order  to  throw  it  back  again  in  the  shape  of 
clothing.  But  this  process  need  not  cause  any  difficulty.  The 
ultimate  object  of  the  wool  is  clothing,  and  the  ultimate  object 
of  everything  is  to  satisfy  the  wants  of  individuals.  The  only 
consumption  with  which  we  are  concerned  at  present  is  that 
of  the  commodities  withdrawn  by  the  individuals,  not  to  be  re- 
turned by  them,  but  to  be  applied  to  their  own  uses.  We 
therefore  leave  the  wool  and  cloth  out  of  consideration,  and 
conceive  the  coat  to  be  brought  in,  not  as  the  sole  contribution 
of  the  tailor,  but  as  the  joint  contribution  of  wool-growers, 
shearers,  railway  managers,  spinners,  weavers,  merchants,  and 
tailors.  We  may,  if  we  please,  imagine  a  separate  central  reser- 
voir into  which  nothing  enters  but  finished  houses,  furniture, 
9 


130  DESCRIPTION  OF  THE  SOCIAL  ORGANISM.       [II.  54. 

bread,  pictures,  clothing,  and  other  articles  to  be  used  for  the 
support  of  those  who  withdraw  them. 

The  economic  welfare  of  each  individual  depends  upon 
what  share  of  these  finished  products  he  has  the  privilege  of 
withdrawing,  and  upon  nothing  else.  Now,  as  a  first  step  to- 
wards understanding  what  causes  affect  the  power  of  the  indi- 
vidual to  withdraw  commodities  from  the  reservoir,  we  shall 
have  to  make  a  distinction  between  causes  which  affect  only 
the  general  welfare  and  those  which  affect  individuals,  or  spe- 
cial classes.  Everything  which  increases  either  the  sum  total  or 
the  quality  of  any  commodity  brought  into  the  reservoir  tends 
to  increase  the  general  welfare,  because  then  there  is  either 
more  of  that  commodity,  or  a  better  article,  for  everybody  who 
wants  it.  If  this  commodity  is  one  of  which  there  is  already  an 
ample  supply,  then  the  increase  to  the  general  welfare  will  be  un- 
important. If  it  is  something  of  which  people  stand  in  great 
need,  and  of  which  the  supply  is  small,  the  increase  forms  an 
important  addition  to  the  general  welfare.  Moreover,  in  any 
case,  the  addition  of  any  commodity  will  directly  benefit  only 
those  who  use  that  commodity.  Now,  economics  and  govern- 
ment policy  can  concern  themselves  only  with  the  welfare  of 
whole  classes  of  individuals ;  and  since  one  class  has  as  good  a 
right  to  their  consideration  as  another^he  general  welfare  is 
that  with  which  they  are  principally  concerned.  Hence  our  first 
conclusion  as  to  whether  an  economic  cause  is  beneficial  or  inju- 
rious in  its  action  must  depend  on  whether  it  tends  to  increase 
or  diminish  the  general  supply  of  commodities  brought  into 
the  great  central  reservoir.  But  as  a  matter  of  scientific  inter- 
est, it  is  perfectly  allowable  and  proper  to  consider  how  special 
classes  and  subdivisions  of  men  are  affected  by  economic  causes. 

Now,  it  does  not  follow,  because  an  increased  supply  of 
some  one  commodity  is  brought  into  the  reservoir,  that  of 
course  everybody  who  wants  that  commodity  can  get  more  of 
it.  It  may  happen  that  through  the  indirect  action  of  the  same 
cause  a  few  unfortunate  persons  may  be  able  to  command  only 
a  smaller  supply.  "We  also  must  recognize  the  action  of  eco- 


II.  55.]  TEE  COMMUNISTIC  POINT  OF  VIEW.  131 

nomic  causes  which,  without  altering  the  total  quantity  brought 
into  the  reservoir,  would  result  in  that  quantity  being  divided 
very  differently  among  separate  classes  of  men.  If  then  we  find 
it  satisfactorily  established  that  any  economic  cause  will  result  in 
some  class  of  men  (carpenters,  for  example)  being  able  to  get 
a  larger  supply  of  commodities,  we  must  see  in  which  of  two 
ways  this  cause  acts.  If  it  acts  through  a  larger  production 
of  those  commodities,  then  it  is  a  public  benefit  of  which 
the  carpenters  are  simply  getting  a  share.  But  if  it  is  a  cause 
which  merely  enables  the  carpenters  to  get  something  which 
otherwise  some  one  else  would  have  got,  then  it  is  merely  trans- 
ferring the  benefit  from  one  class  to  another,  and  is  not  to  be 
regarded  as  an  economic  good,  unless  it  can  be  shown  that 
the  commodities  do  more  good  when  consumed  by  carpenters 
than  when  consumed  by  others. 

This  classification  will  enable  us  to  make  an  important  gen- 
eralization. Those  industrial  and  business  efforts  in  which 
every  man  competes  with  his  fellows  by  trying  to  supply  a 
better  article  to  his  customers  than  his  competitors  can  supply 
tend  to  increase  the  sum  total  of  commodities  produced  and 
so  promote  the  general  good.  Those  efforts  which  consist  in 
placing  restrictions  on  competition  by  limiting  in  any  way  the 
freedom  of  everybody  to  produce  as  much  as  he  is  able  can 
only  benefit  one  class  at  the  expense  of  others. 

55.  Let  us  now  see  what  regulations  would  have  to  be  es- 
tablished for  the  public  good  in  the  distribution  of  the  sum 
total  of  products.  The  reason  why  regulations  are  necessary 
is  that  every  one  wants  to  get  a  share  of  a  great  many  things, 
and  especially  of  the  useful  and  scarcer  things.  His  welfare 
depends  on  what  he  can  get,  and  as  a  general  rule  he  is  a  safe 
judge  of  what  he  wants.  But  it  is  different  with  the  things  he 
brings  in.  These  are  for  other  people,  and  it  is  necessary  for 
the  public  good  that  he  bring  in,  not  what  he  likes  to  produce, 
but  what  other  people  want  to  consume.  How  shall  he  be  in- 
duced to  do  this? 


132          DESCRIPTION  OF  TUB  SOCIAL  ORGANISM.       [II.  55. 

In  considering  this  question  we  shall  assume  that  there  is 
a  central  authority  which  can  make  and  enforce  what  regula- 
tions it  pleases.  Let  us  see  what  would  be  possible  to  sucli  an 
authority,  and  what,  from  the  very  nature  of  things,  impossible. 

I.  The  first  regulation  which  we  see  to  be  necessary  is  that 
no  one  shall  be  allowed  to  draw  things  out  of  the  reservoir  un- 
less he  puts  in  an  equivalent  of  something  that  somebody  wants. 
But  what  kind  of  equivalent  ?    If  nothing  more  than  an  equiv- 
alent in  labor,  then  everybody  would  put  in  what  he  found  it 
easiest  to  make,  and  would  neglect  what  he  found  it  difficult 
to  make.     The  result  would  be  that  there  would  be  a  great 
collection  of  those  things  easy  to  make,  and  a  great  scarcity  of 
everything  else.     Since  many  useful  things  are  hard  to  make, 
we  must  require  something  else  than  an  equivalent  in  labor  of 
production.    "We  may,  at  this  juncture,  be  guided  by  the  prin- 
ciple that  the  quantity  of  each  commodity  brought  in  must,  so 
far  as  possible,  be  so  regulated  as  to  be  just  equal  to  the  quantity 
wanted  to  be  taken  out.     But  even  under  the  most  favorable 
regulations  an  accumulation  of  some  things  and  a  scarcity  of 
others  would  be  unavoidable. 

II.  The  central  authority  would  then  have  to  remedy  this 
inequality.     It  would  perhaps  say  to  the  combined  farmer  and 
miller,  "  You  are  bringing  in  more  flour  than  we  possibly  can  eat, 
while  the  people  cannot  find  enough  good  paper  to  write  their 
letters  on.     Cannot  some  of  you  leave  off  making  flour  and 
begin  the  making  of  paper  ? "    The  answer  would  naturally  be, 
"  It  is  very  easy  to  make  flour  and  very  hard  to  learn  how  to 
make  paper.     You  must  therefore  offer  us  some  inducement 
to  change."     The  question  would  now  arise  on  the  part  of  the 
central  authority  whether  some  privilege  or  advantage  must 
be  held  out  to  induce  the  makers  of  flour  to  learn  how  to  make 
paper.     If  the  principle  is  introduced  that  labor  is  the  only 
measure  of  value,  and  that  one  person  must  gain  no  more  than 
another,  it  would  be  impossible  to  make  the  change.    Evidently 
the  easiest  way  would  be  to  offer  some  inducement  for  making 
paper  rather  than  flour.   Thus  would  arise  that  inequality  in  the 


IL  55.]  THE  COMMUNISTIC  POINT  OF  VIEW.  133 

rights  of  different  contributors  to  the  reservoir  which  human 
experience  in  all  states  of  society  has  shown  to  be  unavoidable. 

III.  Having  thus  established  the  principle  that  inducements 
must  be  held  out  to  secure  the  manufacture  of  the  scarcer  arti- 
cles, the  question  would  arise  just  how  strong  the  inducement 
would  have  to  be.  The  public  at  large  would  have  an  interest 
in  getting  the  paper  with  the  smallest  possible  inducement, 
and  the  latter  ought  to  be  so  regulated  that  there  should  be  an 
exact  balance  between  the  benefit  from  the  increased  supply 
of  paper  and  the  evil  of  offering  a  premium  to  paper-makers. 
This  would  require  some  measure  of  benefit  and  evil,  so  that 
the  benefit  of  getting  a  little  more  paper,  and  the  corresponding 
evil  of  paying  for  its  production,  would  be  set  off  against  each 
other.  This  consideration  would  lead  to  the  still  further  devel- 
opment of  the  plan. 

IY.  Every  producer  who  made  an  addition  to  the  supply  of 
plentiful  articles  would  do  only  a  little  good,  while  if  he  added 
to  the  supply  of  the  scarcer  ones  he  would  do  the  more  good 
the  scarcer  the  article.  The  person  who  took  away  a  supply 
of  the  plentiful  articles  would  do  very  little  evil  to  his  fellows, 
while  he  who  took  a  supply  of  the  scarcer  ones  would  do  more 
and  more  evil  in  proportion  to  their  scarcity.  Thus  would 
arise  the  idea  of  a  measure  of  good  or  evil ;  that  is7,  of  value. 
The  central  authority  might  begin  by  establishing  this  measure 
in  the  case  of  each  commodity.  It  might  say:  "Everyman 
who  brings  in  a  barrel  of  good  flour  shall  be  held  to  do  a  good 
of  §5  ;  and  every  man  who  takes  away  a  barrel  to  do  an  evil  of 
$5.  Every  man  who  brings  in  a  ream  of  paper  shall  be  held 
to  do  a  good  of  $2 ;  and  he  who  takes  it  out  an  evil  of  $2." 
Having  established  such  a  scale  for  every  commodity  in  the 
market,  the  authority  would  await  the  result.  The  most  equi- 
table result  would  evidently  be  that  every  one  should  be  allowed 
to  take  out  a  value  equal,  on  the  established  scale,  to  that  which 
he  brought  in,  and  that  he  should  also  be  allowed  to  bring  in 
what  he  pleased.  If  inequalities  were  still  found,  some  things 
being  plenty  and  others  scarce,  it  would  be  necessary  to  con- 


134          DESCRIPTION  OF  THE  SOCIAL  ORGANISM.       [II.  58. 

tinuc  adjusting  the  scale  of  values ;  and  the  final  result  should 
be  such  adjustment  of  the  scale  that  the  quantity  of  every- 
thing taken  out  should  be  just  equal  to  that  brought  in. 
When  this  was  done  the  operations  of  the  imaginary  society 
\vould  correspond  exactly  with  those  which  have  grown  up 
among  us. 

To  what  in  this  picture  corresponds  the  case  of  non-employ- 
ment of  laborers  ?  In  our  picture  every  man  is  at  liberty  to 
bring  in  as  much  or  as  little  as  he  pleases,  but  laborers  out  of 
employment  can  bring  in  nothing,  and  so  can  acquire  no  right 
in  the  store.  But  what  is  meant  when  we  say  that  laborers  can 
find  no  employment?  Everybody  can  find  employment  oil 
some  terms.  What  is  generally  meant  is  that  they  cannot  find 
employment  at  satisfactory  wages.  Wages  being  what  they 
can  buy  from  the  common  stock  with  the  proceeds  of  their  la- 
bor, this  is  simply  saying  that  what  they  are  allowed  to  take 
out  of  the  reservoir  is  not,  in  their  opinion,  the  proper  equiva- 
lent of  that  which  they  are  willing  to  put  in.  For  this  we  may 
say  that  there  is  no  possible  remedy  so  long  as  every  one  is  at 
liberty  to  work  or  stay  idle.  He  must  be  his  own  judge  of  the 
value  of  his  services,  and  if  he  values  them  too  highly  nobody 
can  help  it. 

56.  The  Conditions  of  General  Prosperity.  The  careful 
thinker  will  note  the  general  tendency  of  the  preceding  con- 
siderations towards  one  conclusion,  namely,  that  general  pros- 
perity is  but  slightly  affected  by  those  measures  in  which  the 
public  take  the  greatest  interest,  that  it  can  practically  vary 
little  from  year  to  year,  and  that  it  can  change  but  slowly  from 
generation  to  generation.  An  illustration  has  already  been  ad- 
duced showing  how  illusory  the  popular  estimates  of  economic 
well-being  are  apt  to  be.  So  accustomed  are  we  to  measure 
this  well-being  by  entirely  insufficient  standards,  that  it  may 
be  well  to  review  the  subject  once  more  from  the  standpoint 
of  common-sense. 

When  is  a  community,  a  class,  or  an  individual  prosperous  ? 


II.  56.]  THE  COMMUNISTIC  POINT  OF  VIEW.  135 

When  they  have  plenty  of  money  ?  No,  for  the  money  is  of 
no  use  to  them.  It  may  enable  them  to  buy,  but  it  cannot 
do  this  unless  the  things  they  want  to  buy  are  first  produced. 
Is  a  man  prosperous  when  his  goods  and  services  are  in  de- 
mand ?  Not  unless  this  demand  will  enable  him  to  buy.  When 
lie  sells  he  gives  what  is  valuable,  and  does  not  receive  a  return 
until  he  buys  something.  The  true  answer  is  that  he  is  eco- 
nomically prosperous  when  he  is  able  to  supply  his  natural  and 
artificial  wants  without  more  labor  than  is  conducive  to  his 
physical  health.  A  class  is  prosperous  when  all  its  members 
enjoy  this  condition  of  prosperity ;  and  when  all  classes  in  the 
community  enjoy  it,  then  certainly  is  the  community  prosper- 
ous, no  matter  how  weak  and  badly  off  it  may  be  when  we 
measure  it  by  the  popular  standard.  Two  opposing  factors 
therefore  come  in — the  supply  or  mass  of  commodities,  and 
the  labor  by  which  that  supply  is  obtained. 

We  have  already  shown,  what  indeed  ought  scarcely  to  need 
showing  to  a  reasonable  being,  that,  so  far  as  the  community 
at  large  is  concerned,  a  necessary  prerequisite  to  the  supply  of 
these  wants  is  that  all  the  agencies  necessary  to  that  end  shall 
be  produced.  If  all  the  people  of  the  country  are  comfortably 
housed  and  supplied  with  all  the  food,  clothing,  furniture, 
books,  and  other  wealth  necessary  to  supply  their  wants,  then 
that  country  is  prosperous.  They  cannot  enjoy  this  wealth 
unless  it  is  produced :  the  houses  must  be  built,  the  grain 
raised,  the  furniture  manufactured,  and  the  clothing  made. 
Moreover,  if  the  community  is  increasing,  not  only  must  the 
existing  houses  be  kept  in  repair,  but  there  must  be  a  continual 
addition  to  their  number.  Conversely,  if  all  these  things  ex- 
ist, that  is,  if  there  are  enough  of  houses,  furniture,  food, 
clothing,  for  everybody,  we  may  be  satisfied  that  no  one  will 
be  compelled  to  go  without  these  necessaries.  It  is  indeed 
conceivable  that  they  might  all  be  owned  by  a  few  persons, 
and  that  those  few  might  refuse  to  let  the  majority  have  any 
share  of  them.  Practically,  however,  this  is  out  of  the  ques- 
tion. No  matter  how  rich  and  fortunate  he  may  be,  a  man 


136          DESCRIPTION  OF  THE  SOCIAL  ORGANISM.       [II.  56. 

can  eat  only  a  certain  small  quantity  of  bread,  and  he  lias 
not  the  slightest  occasion  for  taking  more  than  that  quantity 
from  the  common  store.  Therefore  he  can  have  no  motive 
for  keeping  anybody  else  from  eating  his  share  of  the  bread. 
He  can  only  live  in  one  house,  and  if  he  has  more  houses 
than  that  one  he  will  be  practically  forced  to  let  other  people 
occupy  them  on  such  terms  as  they  choose  to  make.  He 
may  own  a  ship,  but  if  this  ship  could  bring  nothing  but  what 
he  wanted  for  his  own  personal  use  he  would  burn  her  up. 
He  bought  or  built  her  in  order  that  she  might  bring  things 
for  other  people.  We  may  therefore  lay  it  down  as  a  practical 
rule,  taking  human  nature  as  it  is,  that  when  a  community  as 
a  whole  is  amply  supplied,  no  industrious  and  well-behaved 
member  of  that  community  is  likely  to  be  in  serious  permanent 
want.  Thus  we  are  led  to  our  second  factor,  the  conditions  of 
production. 

It  is  equally  evident  that  producing  power  is  the  necessary 
and  sufficient  condition  that  the  wealth  just  shown  to  be  re- 
quired for  prosperity  shall  exist.  So  long  as  the  community 
possesses  the  necessary  land  and  minerals,  so  long  as  it  has  fac- 
tories, mills,  and  mines  all  in  good  working  order,  so  long  as 
its  railways  continue  to  run,  and  its  laborers  and  merchants 
maintain  their  skill  and  good  morals,  so  long  will  the  neces- 
saries of  life  be  produced.  The  producing  power  can  be  im- 
paired only  by  moral  or  physical  causes  acting  upon  the  com- 
munity at  large.  Of  course,  every  cause  which  impairs  con- 
fidence between  man  and  man,  or  which  leads  one  to  doubt 
whether  he  will  be  compensated  for  his  services ;  every  cause 
which  prevents  producers  from  working,  and  every  cause 
which  cuts  off  the  supply  of  material  for  them  to  work  with, 
tends  to  diminish  production.  Hence  the  question  of  national 
prosperity  resolves  itself  almost  entirely  into  that  of  the 
stimulus  to  production. 

This  chapter  is,  more  than  any  other  one,  the  starting-point 
in  the  system  of  economic  investigation  which  will  be  em- 
ployed in  subsequent  parts  of  the  present  work. 


IL57.]     CHANGES  WITH  THE  ADVANCE  OF  SOCIETY.       137 


CHAPTER  X. 

CHANGES   IN   THE   SOCIAL   ORGANISM   WITH   THE   ADVANCE   OF 

SOCIETY. 

57.  WE  may  readily  imagine  the  arts  of  production  to  re- 
main stationary  for  long  periods  of  time.  Economics  would 
then  be  reduced  to  a  system  in  which  it  would  not  be  necessary 
to  consider  progressive  changes  of  any  kind.  Such,  however, 
is  not  the  case  with  our  generation.  We  recognize  two  great 
forms  of  change :  the  one  common  to  the  whole  civilized  world, 
the  other  confined  to  particular  countries.  In  the  first  class  we 
comprise  all  those  improvements  in  capital  and  in  knowledge 
which  lead  to  a  constant  increase  or  improvement  in  the  pro- 
ducts of  labor.  "To  a  very  great  extent,  increase  of  capital  and 
increase  of  knowledge  go  hand  in  hand.  The  reason  of  this  is 
that  when  we  learn  some  new  and  better  way  of  producing  a 
given  article,  it  is  generally  necessary  to  produce  a  new  form 
of  capital  in  order  to  utilize  the  discovery.  To  take  a  familiar 
example,  when  the  compound  engine  was  invented,  the  owners 
of  Atlantic  steamers,  in  order  to  utilize  it,  had  to  remove  their 
old  engines  and  put  in  new  ones  of  the  improved  pattern. 

Our  knowledge  of  the  best  way  of  producing  things  is  con- 
stantly increasing  so  rapidly  that  there  is  no  immediate  prospect 
of  its  reaching  a  stationary  condition.  Yet  it  would  seem  that 
it  must  ultimately  approach  such  a  condition,  though  it  is  diffi- 
cult to  say  how  many  generations  or  how  many  centuries  may 
be  required.  If  we  look  closely  into  the  matter,  we  see  that 
the  causes  of  progress  form  a  very  widely  extended  class.  They 
include  not  merely  improvements  made  and  applied  within  any 
one  country,  but  knowledge  of  the  wants  and  capacities  of 
foreign  countries,  and  the  results  of  that  experience  which  is 
gradually  teaching  us  the  best  way  of  doing  many  things. 
Such  results  tend  gradually  to  embody  themselves  in  fixed 


138          DESCRIPTION  OF  THE  SOCIAL  ORGANISM.       [II.  57. 

habits.  "We  readily  perceive  that  the  system  by  which  the 
body  of  farmers  on  the  prairies  of  the  West  exchange  goods 
with  various  countries  in  Europe,  Asia,  and  South  America  is 
exceedingly  intricate  in  its  details.  Its  successful  operation 
depends  upon  the  proper  co-ordination  of  the  efforts  of  manu- 
facturers, merchants,  ship-owners,  and  managers  of  railways. 
There  being  little  real  concert  of  action  among  these  widely 
separated  individuals,  the  co-ordination  of  their  work  is  a  mat- 
ter of  slowly  growing  habit. 

Thus  we  may  see  that  the  commercial  supremacy  of  New 
York  is  entirely  a  result  of  habit  and  of  convenience.  Men 
from  all  parts  of  the  country  send  there  to  buy  their  goods, 
because  they  know  that  they  can  make  a  better  selection  and  be 
more  likely  to  find  exactly  what  they  want  there  than  they  can 
anywhere  else.  The  very  fact  that  so  many  kinds  of  people  are 
thus  led  to  going  thither  makes  it  pay  the  merchants  of  that 
place  to  supply  themselves  with  every  possible  kind  of  goods 
to  meet  the  demand.  It  does  not  pay  the  merchants  of  Boston 
to  keep  on  hand  so  large  a  supply  of  everything  the  people 
want  as  is  found  in  New  York,  because  the  people  of  the  in- 
terior would  not  find  it  out,  and  are  not  in  the  habit  of  going 
in  such  great  numbers  to  Boston  to  buy.  The  result  is  a 
tendency  in  the  great  movements  of  commerce  of  all  countries 
to  concentrate  themselves  alone:  certain  lines  and  in  certain 

o 

cities.  The  only  limit  to  this  concentration  is  the  physical  im- 
possibility of  handling  more  than  a  limited  amount  of  goods 
within  the  limited  space  occupied  by  any  one  city. 

In  the  same  class  of  causes  we  must  include  the  opening  up 
of  new  sources  of  supply  in  distant  and  uncivilized  countries. 
The  great  Asiatic  countries,  especially  China  and  Japan,  are 
gradually  coming  into  communication  with  the  rest  of  the  world, 
and  the  resources  of  Africa  are  rapidly  being  discovered  and 
opened  out.  Thus  there  is  a  gradual  tendency  towards  a  state 
of  things  in  which  every  part  of  the  world  will  supply  every 
other  part  with  the  goods  which  it  can  make  to  the  greatest 
advantage. 


H.  58.]    CHANGES  WITH  THE  ADVANCE  OF  SOCIETY.        139 

58.  In  the  United  States,  besides  this  improvement  in  capi- 
tal and  methods  of  production,  \ve  have  had  a  change  dne  to 
the  increase  of  population.  This  increase  is  productive  both 
of  advantages  and  disadvantages  to  the  organism  as  a  whole. 
The  disadvantage  is  the  continual  diminution  in  the  supply  of 
the  natural  agents  of  production  which  can  be  commanded  by 
each  individual.  The  larger  the  population  the  less  land  each 
individual  must  draw  his  subsistence  from.  Of  course  until 
population  reaches  a  certain  density  this  diminution  is  not  felt. 
No  one  needs  more  land  than,  with  the  least  amount  of  labor, 
will  yield  him  the  food,  cotton,  tobacco,  cattle,  and  timber  nec- 
essary for  his  use.  So  long  as  the  population  is  not  dense  enough 
to  encroach  upon  this  minimum,  so  long  no  disadvantage  is 
felt.  But  when  the  individual  has  to  raise  his  subsistence  from 
a  smaller  surface  of  soil,  he  is  obliged  to  introduce  improved 
methods  of  cultivation,  and  to  limit  himself  in  the  enjoyment 
of  those  products  of  the  soil  which  require  the  cultivation  of 
extended  areas.  Thus  the  denser  the  population  becomes  the 
more  capital  and  labor  it  will  be  necessary  to  devote  to  sub- 
sistence, and  the  more  liable  the  poorer  members  will  be  to 
suffer  from  privation. 

The  advantages  of  a  dense  population  are  obvious  and  numer- 
ous. The  social  attractions  of  great  cities  are  powerful  eco- 
nomic causes  tending  to  bring  men  together  in  them.  But  the 
great  advantage  of  a  dense  population  in  production  arises  from 
the  increased  facility  with  which  closely  associated  men  can 
co-operate  in  production.  In  a  widely  scattered  population  the 
division  and  organization  of  labor  on  a  great  scale  are  impos- 
sible, because  these  require  large  bodies  of  men  to  work  to- 
gether. The  greater  the  number  of  such  bodies  of  men  the 
greater  the  variety  of  articles  which  can  be  made  within  con- 
venient reach  for  the  use  of  the  whole  community. 

"We  must  also  notice  that  the  result  of  improvements  in  pro- 
duction is  not  merely  that  each  individual  secures  a  larger 
supply  of  the  necessaries  of  life,  but  that  he  gets  those  supplies 
of  better  quality  and  in  a  larger  variety  of  forms,  and  therefore 


140          DESCRIPTION  OF  THE  SOCIAL  ORGANISM.       [II.  59. 

can  better  suit  his  taste  and  peculiarities.  The  farmer  of  to-day 
does  not  eat  any  more  than  his  predecessor  did  a  hundred  years 
ago,  nor  does  the  rich  man  of  to-day  necessarily  eat  more  than 
the  poor  man.  But  the  modern  farmer  has  better  food  than 
the  farmer  of  a  hundred  years  ago  had,  and  the  man  of  wealth 
has  a  greater  variety  of  food  than  the  poor  man.  We  have 
not  many  more  chairs  in  our  houses  now  than  our  forefathers 
had,  but  they  are  a  different  kind  of  chair.  Our  watches  and 
clocks  are  more  numerous,  and  we  have  many  more  books  and 
pictures.  Altogether  we  devote  nearly  as  much  labor  to  pro- 
duction as  they  did,  but  we  get  far  more  variety  and  better 
results  from  it. 

59.  Looking  at  the  matter  more  closely,  we  perceive  that 
these  improvements  in  production  involve  a  change  in  the  rela- 
tive proportions  of  men  engaged  in  various  classes  of  employ- 
ments. The  reason  of  this  is  that  great  improvements  are 
confined  to  certain  kinds  of  production.  As  one  extreme  case 
we  may  take  the  building  of  a  brick  house.  "We  are  scarcely 
able  to  do  this  to  any  better  advantage  than  our  ancestors. 
We  have  indeed  learned  to  use  machinery  in  moulding  bricks, 
and  in  the  case  of  large  buildings  we  employ  steam  hoisting- 
apparatus  to  raise  the  materials  as  the  walls  go  up.  But,  leaving 
out  these  comparatively  small  improvements,  the  labor  of  mak- 
ing the  necessary  material  and  erecting  the  walls  is  almost  the 
same  that  it  has  been  for  thousands  of  years. 

Improvements  in  agriculture  may  be  considered  as  interme- 
diate between  the  two  extremes.  By  the  use  of  sowing  and 
harvesting  machinery,  and  by  improvements  in  methods  of 
cultivation,  we  are  enabled  to  secure  our  supply  of  agricultural 
products  with  only  a  fraction  of  the  labor  necessary  a  few  gen- 
erations ago.  But  the  labor  necessary  to  care  for  the  crop  and 
take  it  to  market  cannot  be  greatly  diminished. 

The  extreme  cases  of  improvement  are  those  already  de- 
scribed. They  consist  principally  in  the  making  by  machinery, 
on  a  large  scale,  of  what  was  formerly  done  entirely  by  hand. 


11.61.]    CHANGES  WITH  THE  ADVANCE  OF  SOCIETY.        141 

The  spinning  and  weaving  of  cotton,  the  making  of  watches, 
the  sewing  of  shirts,  and  the  printing  of  books  and  newspapers 
may  be  taken  as  cases  in  point. 

60.  One  result  of  such  improvements  is  a  continual  increase 
in  the  ratio  of  the  urban  to  the  rural  population.     Since  it  is 
absolutely  necessary  that  men  shall  live  on  the  farms  which 
they  cultivate,  an  agricultural  city  is  an  impossibility.     Hence 
we  must  always  have,  besides  the  dwellers  in  cities,  a  certain 
population  scattered  over  the  country.     But  the  labor  of  this 
population  is  more  and  more  confined  to  the  management  of 
the  rude  products  of  the  soil.     The  grain  once  harvested,  the 
cotton  once  gathered,  and  the  cattle  once  killed,  everything 
that  follows  can  be  more  advantageously  done  by  large  co-oper- 
ating bodies  of  men.     Such  bodies  are  most  easilv  collected  in 

»/ 

towns  and  villages.  Hence,  as  improvements  go  on,  a  con- 
tinually larger  proportion  of  the  population  is  found  congre- 
gated in  the  cities.  "We  may  see  this  by  studying  our  Census 
reports.  "We  find  that  not  only  does  each  individual  city  in- 
crease in  about  the  same  ratio  as  the  entire  population,  but  new 
cities  are  continually  arising. 

61.  A  general  characteristic  of  social  progress,  the  enuncia- 
tion of  which  is  due  to  Herbert  Spencer,  will  give  us  aluminous 
and  comprehensive  view  of  the  subject.     Progress  consists  in 
two  continuous  and  connected  processes,  the  one  called  differ- 
entiation or  specialization,  the  other  integration. 

The  former  term  expresses  the  fact  that  individual  men 
become  different  from  their  fellow-men  by  the  acquisition  of 
special  powers  or  faculties.  The  denser  the  population,  and 
the  more  refined  the  special  kinds  of  skill  found  among  partic- 
ular men,  the  more  numerous  the  men  who  can  do  some  useful 
thing  better  than  any  of  their  fellows.  In  a  primitive  state  of 
society  there  are  very  few  trades.  As  society  increases  men 
differentiate  themselves  more  and  more  by  following  more 
numerous  and  specialized  occupations.  The  extremes  of  differ- 


142  DESCRIPTION  OF  TUB  SOCIAL  ORGANISM. 

entiution  arc  approached  when  a  man  devotes  himself  to  mak- 
in<*  some  one  part  of  a  watch,  or  when,  as  in  Switzerland,  a 
manufacturing  firm  is  devoted  to  making  a  particular  kind  of 
hands  for  a  watch. 

This  process  of  differentiation  necessarily  implies  that  each 
individual  must  come  into  closer  and  more  important  relations 
with  a  continually  increasing  number  of  his  fellow-men.  The 
watchmaker  of  old  needed  but  few  customers.  But  the  man 
who  does  nothing  but  make  the  hands  of  a  watch  must  have  a 
great  number.  Thus,  as  differentiation  goes  on,  every  part  of 
the  social  organism  becomes  more  closely  connected  with  every 
other  part.  This  increasing  adaptation  of  the  parts  of  the 
organism  is  called  integration. 

QUESTIONS. 

1.  Describe  as  fully  as  you  can  the  natural  requisites  of  production  nec- 
essary iu  the  erection  of  a  house. 

2.  Can  you   give    any  examples  additional  to  those  of  §  20  showing 
that  knowledge  pursued  with  the  object  of  gain  is  not  generally  productive 
of  results  useful  to  mankind  at  large? 

3.  Can  you  give  any  reason  why  the  owner  of  land  should  have  the 
exclusive  use  of  any  water-power  which  may  be  obtained  from  a  stream 
flowing  through  his  premises? 

4.  What  food  is  necessarily  consumed  in  the  production  of  a  coat? 

5.  If  a  farmer  is  induced  to  invest  in  a  steam-plough,  what  will  be  the 
debit  and  credit  side  of  his  account? 

6.  Iu  what  cases  should  we  regard  a  carriage  as  capital,  and  in  what  cases 
as  sustenance? 

7.  When  we  speak  of  a  negative  capitalist,  is  it  the  capital  itself  or  his 
property  in  capital  which  is  negative? 

8.  To  what  extent  should  a  theatre  be  regarded  as  capital?    If  you  regard 
it  as  capital  with  respect  to  the  owner,  but  not  as  capital  with  respect  to  the 
country  at  large,  then  who  are  the  negative  capitalists  and  what  is  the  in- 
terest which  they  pay  on  that  negative  capital?    (Note  that  the  essential 
mark  of  a  negative  capitalist  is  that  he  is  paying  interest  on  some  fund 
which  he  is  not  using  as  capital,  but  is  enjoying  as  sustenance.) 

9.  Show  that  the  negative  capitalist  must  pay  interest  instead  of  receiving 
it.    Is  every  one  who  pays  interest  necessarily  a  negative  capitalist  to  that 
extent?      If  so,  give  as  many  examples  as  you  can  of  negative  capitalists. 


QUESTIONS.  143 

How  is  it  with  a  man  who  borrows  money  to  expend  in  stocking  bis  farm? 
Is  his  capital  positive,  negative,  or  zero? 

10.  If  we  should  compare  the  population  of  New  York  and  of  Switzer- 
land with  respect  to  the  ratio  of  the  laboring  units  to  the  total  population, 
would  you  expect  the  ratio  to  be  nearly  the  same  in  the  two  countries?    In 
which  country  would  you  consider  it  to  be  the  greater?    How  would  the 
ratio  in  this  country  a  century  ago  compare  with  the  present  ratio? 

11.  Can  a  national  loan  add  to  the  capital  of  a  country? 

12.  "  If  there  are  human  beings  capable  of  work,  and  food  to  feed  them, 
they  may  always  be  employed  in  producing  something."    Can  they  neces- 
sarily produce  the  equivalent  of  the  food  they  consume?    If  not  necessarily, 
under  what  conditions  can  they?    Take,  as  a  starting  point,  the  state  of 
things  if  the  fixed  capital  of  a  country  were  all  destroyed,  but  the  suste- 
nance all  preserved. 

13.  Is  there  any  inherent  necessity  that  wealth  should  be  consumed  in 
order  to  perform  the  functions  of  capital — e.g.,  if  a  machine  could  be  made 
which  would  run  forever  without  wear,  would  it  lack  any  essential  prop- 
erty of  capital? 

14.  In  1871  a  large  part  of  the  city  of  Chicago  was  destroyed  by  fire. 
Could  the  people  of  the  city  have  rebuilt  it  without  outside  help?    If  not, 
point  out  the  nature  of  the  help  rendered  from  outside. 

15.  Point  out  the  iufluence  of  steam-transportation  upon  the  ratio  of  the 
urban  to  the  rural  population. 

16.  How  does  the  modern  system  of  production  by  large  organizations 
operate  upon  the  shiftless  class  who  will  never  stick  to  a  regular  line  of 
work?    Show  why,  when  this  class  really  wants  to  work,  it  is  harder  to 
get  it  than  it  would  be  in  a  primitive  community. 

17.  Do  fidelity  and   reliability  on  the  part  of  the  common  laborer  be- 
come more  or  less  necessary  with  the  progress  of  society? 

18.  What  reasons  can  you  give  for  considering  that,  other  conditions 
being  equal,  that  country  is  best  off  in  which  the  ratio  of  the  laboring  units 
to  the  whole  population  is  the  least?    Granting  the  relation,  which  term  is 
cause  and  which  effect?    That  is,  is  the  country  well  off  in  consequence  of 
the  small  number  of  laboring  units,  or  is  this  number  small  because  of  the 
prosperity? 

19.  To  what  extent  is  a  contractor  engaged  in  building  houses  a  laborer, 
and  to  what  extend  a  capitalist?    What  form  docs  his  capital  take?    Is  it 
necessary  that  he  should  have  any  capital  at  all,  and  if  so,  why? 

20.  Enumerate  so  far  as  you  are  able  the  various  classes  of  men  who  re- 
ceive wages  in  the  widest  economic  sense.     If  you  begin  with  those  highest 
in  rank,  who  would  come  first? 


144  DESCRIPTION  OF  THE  SOCIAL  ORGANISM. 

21.  Enumerate,  so  far  as  you  are  able,  those  classes  of  persons  working 
for  hire  whom  you  would  put  into  Walker's  third  class,  and  those  whom 
you  would  put  into  the  fourth  class. 

22.  Can  you  see  any  difficulties  in  the  way  of  abolishing  all  wages  by 
time  and  paying  laborers  by  the  piece?    If  so,  enumerate  them. 

28.  If  the  organization  of  labor  described  in  §  86  were  carried  to  the 
highest  degree,  describe  the  result  so  far  as  you  are  able. 

24.  Can  you  explain  why  the  co  operative  system,  under  which  the  opera- 
tives dispense  with  master-workmen  and  managers  to  run  the  factory,  and 
make  the  shoes  themselves,  and  thus  get  the  whole  price,  has  not  been  more 
successful? 

25.  Define  what  portion  of  the  price  paid  for  a  coat  goes  to  compensate 
the  friction  of  exchange. 

26.  Explain  as  well  as  you  can  in  what  manner  the  checks  upon  the 
increase  of  population  will  act  when  the  population  begins  to  encroach 
upon  the  means  of  subsistence. 

27.  What  is  the  effect  of  encroachment  on  the  means  of  subsistence 
upon  the  efficiency  of  labor  (§  41)? 

28.  Does  the  proportion  of  the  population  engaged  in  intellectual  pur- 
suits tend  to  increase  or  diminish  with  the  increase  of  wealth? 

29.  How  do  you  reconcile  the  rapid  growth  of  population  in  civilized 
countries  during  the  present  century  with  the  JVIalthusian  theory? 

30.  Is  there  any  method  of  calculation  by  which  we  can  approximate  to 
the  total  population  which  the  earth  can  sustain?    If  so,  state  the  method, 
and  show  what  data  are  necessary  to  apply  it. 

81.  Has  cheap  transportation  of  passengers  and  goods  across  the  ocean 
tended  to  retard  or  to  stimulate  emigration? 


II.  62.]  OF  MONET.  145 


DIVISION  C. — THE  MECHANISM  OF  EXCHANGE. 


CHAPTER  XI. 

OF   MONET. 

62.  THE  necessity  of  exchange  arises  from  the  division  of 
labor.  If  there  were  no  such  division,  then  every  man  would 
make  all  things  necessary  for  human  wants,  and  hence  might 
supply  all  his  own  wants.  He  would  then  not  need  to  exchange 
with  other  persons.  But,  in  the  actual  state  of  society,  each 
producer  generally  makes  a  large  quantity  of  some  one  com- 
modity, and  in  order  to  supply  his  wants  he  must  exchange  this 
commodity  for  a  great  number  of  other  commodities. 

We  have  already  defined  two  possible  systems  on  which  this 
exchange  might  be  effected,  the  one  barter,  the  other  sale.  By 
the  method  of  barter  the  exchange  of  one  quantity  for  another 
would  be  made  by  a  mutual  transfer  of  the  ownership  of  the 
commodities  exchanged.  We  have  shown  how  impossible  such 
a  system  would  be  in  civilized  society,  and  how  by  the  intro- 
duction of  a  common  medium  of  exchange,  called  money,  the 
difficulties  in  the  way  of  barter  are  avoided. 

But  to  understand  correctly  the  theory  of  exchange  it  must 
be  remembered  that  its  ultimate  result  is,  after  all,  barter,  in 
that  commodities  are  ultimately  exchanged  for  commodities. 
To  show  this,  let  us  suppose  the  owner  of  a  pair  of  shoes  to  sell 
them,  and  with  the  money  to  buy  a  barrel  of  flour.  In  doing 
this  he  has  made  two  exchanges,  selling  the  shoes  for  the  money 
and  buying  the  flour  with  the  money.  But  so  far  as  ho  is  con- 
cerned, all  he  has  done  and  all  he  wanted  to  do  is  to  exchange 

7  O 

his  shoes  for  the  flour.     The  money  was  only  an  intermediate 
10 


146          DESCRIPTION  OF  THE  SOCIAL  ORGANISM.       [II.  62. 

agent  which  enabled  him  to  effect  this  exchange.  This  is  why 
money  is  called  the  medium  of  exchange. 

The  function  of  money  in  leading  to  what  is  equivalent  to 
barter,  and  the  nature  of  the  exchanges  which  are  actually 
made  in  the  social  organism,  can  be  most  clearly  apprehended 
by  referring  to  the  communistic  view  of  the  operations  of  the 
organism  which  has  been  set  forth  in  Chapter  IX. 

We  there  introduced  the  conception  of  each  producer  bring- 
ing his  product  to  a  central  point,  and  depositing  it  in  a  com- 
mon stock  for  the  benefit  of  other  men.  In  return  for  this  he 
is  permitted  to  take  from  the  common  stock  such  equivalent 
of  the  products  of  other  men  as  he  desires.  We  have  shown 
how  difficult  and  complex  would  be  the  problem  of  deciding 
how  much  of  any  commodity  he  should  be  allowed  to  take  from 
the  common  stock  in  exchange  for  what  he  brought  into  it. 
By  the  use  of  money  this  requirement  is  fulfilled  in  a  wonder- 
ful manner,  and  the  most  complex  problem  which  could  be 
presented  to  the  central  authority  is  solved  at  once  without 
serious  trouble  to  anybody.  The  benefit  conferred  by  bringing 
wealth  in  and  the  evil  caused  by  withdrawing  it  are  measured 
by  the  money  received  and  paid.  For  example,  considering 
a  shoemaker  in  his  relations  to  society  at  large,  that  is,  to 
all  other  individuals  of  the  community,  we  see  that  when  he 
sells  a  pair  of  shoes  he  puts  them  into  the  common  stock  for 
the  benefit  of  other  people.  The  measure  of  this  benefit  was 
the  money  that  he  received  for  them,  and  the  possession  of 
this  money  was  his  certificate  that  he  had  rendered  the  benefit. 
When  he  bought  flour  with  the  money  he  surrendered  this 
certificate  and  took  a  barrel  of  flour  from  the  common  stock. 
His  right  to  draw  from  the  common  stock  on  account  of  his 
shoes  then  terminated.  In  consideration  of  giving  other  people 
a  pair  of  shoes  other  people  gave  him  a  barrel  of  flour. 

Our  next  questions  will  be  what  commodities  can  be  used 
as  money ;  and  what  requirements  these  commodities  must  ful- 
fil in  order  to  perform  the  functions  of  money  in  the  most  ad- 
vantageous manner. 


II.  63.]  OF  MONET.  147 

63.  Acquirements  of  the  Medium  of  Exchange.  From 
\vhat  has  already  been  said  we  see  that  all  civilized  communi- 
ties are  in  need  of  some  common  commodity  called  money  for 
which  all  other  commodities  shall  be  exchanged.  "We  also  call 
to  mind  that  exchange  consists  in  a  mutual  transfer  of  owner- 
ship, the  ownership  of  the  goods  passing  from  the  seller  to  the 
buyer,  and  that  of  the  money  in  the  reverse  direction.  We  have 
now  to  examine  what  requirements  money  should  fulfil. 

FIRST  REQUIREMENT.  It  must  have  value.  To  see  the  rea- 
son for  this  requirement,  let  us  take  the  case  of  a  man  who 
agrees  to  work  one  month  for  the  sum  of  $30.  If  his  employer 
could  agree  beforehand  that  this  $30  should  purchase  for  him 
a  certain  amount  of  clothing,  flour,  and  other  necessaries,  it 
would  make  little  difference  to  him  whether  it  had  or  had  not 
value.  But  no  such  guarantee  is  possible.  The  employe  can 
buy  with  his  monej7  only  as  much  as  it  has  the  power  to  com- 
mand from  the  dealer,  the  shoemaker,  the  grocer,  and  the  other 
persons  who  are  to  supply  his  needs.  Moreover,  the  commodi- 
ties he  can  thus  buy  measure  what  his  money  is  really  worth 
to  him.  Let  us  suppose  that  he  wants  to  have  a  pair  of  shoes 
made.  It  is  very  clear  that  if  the  shoemaker  can  get  money 
without  going  to  the  trouble  of  making  shoes,  he  is  not  going 
to  make  shoes  for  the  laborer  for  the  sake  of  the  money.  The 
same  is  true  of  every  one  who  supplies  the  laborer's  wants. 
Hence  it  is  clear,  if  the  latter  is  not  to  be  deceived,  that  the 
money  which  he  receives  must  be  something  which  the  grocer, 
the  shoemaker,  and  the  tailor  cannot  get  except  by  working 
for  it  as  he  himself  does.  It  must  also  be  desired  by  them, 
because  of  course  they  will  not  work  for  what  they  do  not 
desire. 

Thus  three  necessary  qualities  of  money  are  (1)  that  it  must 
be  desirable,  (2)  limited  in  supply,  and  (3)  incapable  of  being 
commanded  except  by  labor.  These  elements,  as  we  shall 
hereafter  see,  determine  value.  The  somewhat  vague  yet  ex- 
cellent term  purchasing  power  is  applied  to  the  power  pos- 
sessed by  money  to  command  commodities.  We  may  then  say 


148          DESCRIPTION  OF  THE  SOCIAL  ORGANISM.       [II.  64. 

that  the  purchasing  power  of  money  is  the  measure  of  its  value 
to  the  person  who  possesses  it. 

SECONDLY.  The  value  of  money  must  be  definite  and  per- 
manent. If  the  commodity  used  as  money  is  something  of 
which  either  the  desirability  or  the  quantity  at  hand  fluctuates 
widely  from  week  to  week,  then  the  seller,  laborer,  or  other 
receiver  of  money  can  never  know  beforehand  what  quantity 
of  the  necessaries  of  life  the  money  which  he  is  getting  will 
purchase  for  him.  It  may  possibly  be  weeks,  months,  or  years 
before  he  will  want  to  expend  the  money  for  the  necessaries  of 
life ;  but  he  wants  a  reasonable  assurance  that  when  lie  does 
expend  it  it  will  buy  as  much  as  it  would  when  he  gets  it.  This 
constancy  of  purchasing  power  implies  constancy  of  value,  and 
therefore  a  general  constancy  in  the  conditions  of  supply. 

THIRDLY.  Money  must  possess  durability.  If  it  is  liable 
to  wear  out  or  deteriorate  as  it  passes  from  hand  to  hand,  it 
speedily  disappears  and  no  person  could  with  safety  keep  it  for 
a  long  time.  To  avoid  this  difficulty  it  must  be  something 
which  is  as  durable  as  possible. 

FOURTHLY.  It  must  admit  of  convenient  subdivision.  Of 
the  vast  multitude  of  commodities  or  services  necessary  to  sup- 
ply human  wants,  some  have  to  be  bought  in  small  and  others 
in  large  quantities.  Thus  payments  of  various  amounts  have 
to  be  made,  which  cannot  be  done  unless  the  money  by  which 
they  are  made  can  be  divided  up  to  any  extent. 

FIFTHLY.  It  must  be  something  which  can  readily  be  trans- 
ported from  place  to  place,  and  thus  be  at  convenient  command 
of  the  owner.  This  needs  neither  illustration  nor  proof. 

64.  The  commodities  which  most  nearly  fulfil  all  the  pre- 
ceding conditions  are  the  precious  metals,  gold  and  silver. 
These  metals  have  therefore  long  formed  the  universal  medium 
of  exchange  among  civilized  nations,  with  some  exceptions 
which  will  be  considered  from  time  to  time.  Yet  it  cannot  be 
claimed  that  they  absolutely  fulfil  any  of  the  above  require- 
ments. All  we  can  say  is  that  they  come  nearer  to  the  fulfil- 


II.  65.]  OF  MONET.  149 

ment  than   any  other   commodities  -with  which   we   are   ac- 
quainted. 

Other  commodities  have  been  temporarily  used  by  people 
who  could  not  readily  command  the  precious  metals.  Among 
tribes  engaged  principally  in  the  chase,  furs  and  skins  have 
been  employed  as  money.  These  formed  the  medium  of  ex- 
change between  the  Hudson  Bay  Company  and  the  Indians. 
Among  pastoral  tribes  sheep  and  cattle  have  frequently  been 
used.  In  the  early  history  of  the  American  colonists  wampum 
was  the  medium  of  exchange  with  the  Indian  tribes.  When 
the  metals  have  come  into  use,  it  is  not  always  gold  or  silver 
that  is  first  employed.  Platinum  coins  were  once  in  use  in 
Russia.  The  smallest  coins  of  Europe  are  made  of  copper, 
although  it  is  gradually  giving  way  to  the  alloys  of  nickel,  out 
of  which  our  small  coins  are  made.  We  might  not  inappro- 
priately include  in  this  class  an  irregular  kind  of  money,  the 
paper  notes  sometimes  issued  by  governments  in  dire  distress. 
But  although  these  notes  arc  intended  for  use  as  money,  they 
generally  purport  to  be  promises  to  pay  money,  and  not  the 
money  itself.  It  will  hereafter  be  shown  how  and  under  what 
conditions  such  promises  can  take  the  place  and  fulfil  the  func- 
tions of  money. 

65.  Methods  in  which  the  Precious  Metals  are  utilized 
as  Money.  When  one  sells  a  commodity,  it  is  essential  that 
he  shall  know  how  much  money  he  is  getting  in  exchange; 
hence  arises  the  necessity  of  measuring  money.  In  the  early 
stages  of  society  the  money  is  measured  by  its  weight;  men 
sell  for  so  many  pounds  or  ounces  of  gold  or  silver.  This  seems 
to  have  been  the  case  in  ancient  times.  We  read  of  the  pieces 
of  silver  with  which  Abraham  bought  land.  So,  after  the  gold 
discoveries  in  California,  payments  were  made  in  mining  com- 
munities by  weighing  gold-dust.  But  the  weighing  of  all 
money  paid  is  too  troublesome  in  ordinary  transactions,  to  say 
nothing  of  the  difficulty  of  insuring  the  fineness  or  purity  of 
the  metal.  Hence,  from  an  early  age  of  the  world's  history, 


150          DESCRIPTION  OF  THE  SOCIAL  ORGANISM.       [II.  60. 

governments  have  adopted  the  policy  of  coining  the  precious 
metals  into  pieces  of  definite  weight.  Such  pieces  of  metal 
are  now  universally  used  in  domestic  transactions.  Thus  we 
have  certain  weights  of  gold  in  England,  France,  and  America 
known  respectively  as  pounds,  francs,  and  dollars. 

The  way  in  which  money  gets  into  circulation  is  ordinarily 
this:  When  any  possessor  of  gold  or  silver  desires  to  use  it  in 
purchasing  commodities  he  sends  it  to  a  mint.  The  mint  is  a 
kind  of  factory  established  by  the  government  for  purifying 
the  precious  metals  and  making  them  into  coins.  At  the  mint 
the  government  makes  the  gold  and  silver  bullion  brought  to 
it  into  coins,  and  returns  it  to  the  owner  in  the  form  of  money. 
Some  governments  coin  all  the  bullion  brought  to  them  free 
of  charge,  while  others  demand  a  small  percentage  for  the  ex- 
pense of  the  operation.  As  a  general  rule,  however,  the  charge 
is  so  small  as  not  to  be  a  very  important  item  in  the  value  of 
the  money. 

66.  The  reason  for  governments  undertaking  the  coinage 
of  money  is  that,  if  the  coinage  is  honestly  executed,  it  affords 
the  best  assurance  that  the  coin  is  what  it  professes  to  be.  If 
individuals  or  corporations  were  allowed  to  issue  money,  the 
question  would  be  constantly  arising  whether  any  particular 
coin  did  or  did  not  contain  the  requisite  amount  of  metal.  But 
when  a  government  coins,  the  weight  and  quality  of  the  metal 
in  the  coin  is  fixed  by  law.  Each  nation  determines  for  itself 
what  amount  of  metal  shall  be  contained  in  a  given  coin.  If 
we  compare  the  moneys  of  England,  France,  and  America,  we 
find  the  fundamental  units  to  be  entirely  different.  The  Eng- 
lish pound  contains  nearly  as  much  gold  as  five  American 
dollars,  and  one  American  dollar  contains  more  than  five 
francs.  But  it  is  essential  that  whatever  coin  is  issued  under 
a  given  name  shall  be  as  invariable  as  possible  from  generation 
to  generation.  Otherwise  we  have  changes  in  the  meaning  of 
the  word  "  pound,"  "  dollar,"  or  "  franc,"  which  would  be  in- 
tolerable. 


II.  67.]  OF  MONET. 

"When  a  government  undertakes  to  coin  money,  its  first  step  is 
to  prescribe  how  much  gold  or  silver  shall  be  put  into  a  coin,  and 
to  give  that  coin  a  name.  The  name  should  then  indicate  the 
quantity  of  the  metal  of  which  the  coin  consists.  Some  econo- 
mists have  objected  to  giving  special  names  to  the  coins,  be- 
cause these  names  impress  the  ignorant  public  with  the  idea 
that  some  element  of  value  resides  in  the  name  itself.  For  ex- 
ample, all  ignorant  people  who  do  not  possess  unusually  good 
sense  think  that  a  dollar  has  some  peculiar  element  of  value 
which  does  not  reside  in  twenty-six  grains  of  ordinary  gold. 
Hence  it  might  have  been  better  to  designate  coins  simply 
by  their  weight,  as  so  many  grains  or  grams  of  gold  or  silver. 
But  it  is  questionable  whether  the  superstition  would  have 
been  done  away  with  by  any  system  of  naming.  The  English 
pound  was  not  originally  the  name  of  the  coin,  but  meant  a 
pound  of  silver.  But  this  did  not  prevent  more  than  one  king 
from  making  a  coin  which  contained  less  than  a  pound  of  sil- 
ver and  calling  it  a  pound.  At  the  present  time  no  one  ever 
thinks  of  any  relation  between  the  pound  sterling  and  the 
pound  weight. 

67.  Legal-tender  Quality  of  Money.  As  a  general  rule 
the  great  body  of  the  coined  money  of  each  nation  is  a  legal 
tender  for  all  payments  made  under  its  laws.  It  is  very  essen- 
tial to  clearly  understand  how  the  necessity  of  making  money 
legal  tender  arises.  It  arises  because  men  must  have  some 
common  understanding  as  to  what  shall  be  meant  when  one 
person  agrees  to  pay  another  a  specified  sum  of  money.  We 
can  readily  imagine  that  if  there  were  no  such  understanding, 
disputes  might  arise  as  to  what  sort  of  dollars  or  cents  or  cur- 
rency a  party  had  agreed  to  pay.  Such  disputes  would  be 
especially  liable  to  arise  when,  as  is  always  the  case,  substitutes 
for  the  precious  metals  are  used  as  money.  They  are  avoided 
by  a  legal  provision  that  when  a  person  agrees  to  pay  a  sum  of 
money  within  the  jurisdiction  of  any  country,  the  agreement 
shall  be  construed  to  refer  to  the  coin  issued  from  the  estab- 


152          DESCRIPTION  OF  THE  SOCIAL   ORGANISM.       [II.  67. 

lishcd  mints  of  that  country.  Money  with  which  this  right  is 
associated  is  called  a  legal  Under. 

The  legal  tender  of  a  given  kind  of  coin  may  be  limited  or 
unlimited.  It  is  limited  when  the  legal  understanding  is 
that  payments  can  be  made  by  it  only  to  a  certain  amount ; 
unlimited  when  there  is  no  such  legal  understanding.  Some 
of  our  small  silver  coins,  for  example,  are  a  legal  tender  to  the 
amount  of  $1,  and  others  to  the  amount  of  $5  or  $10.  The 
largest  and  most  important  coins  are  a  legal  tender  to  any 
amount.  The  effect  of  the  limit  is  this:  No  creditor  is  com- 
pelled to  accept  payment  and  give  the  debtor  a  release  if  the 
coin  is  not  a  legal  tender  to  the  amount  of  the  debt,  but  may 
require  payment  in  coin  which  is  a  tender  to  the  full  amount. 

The  power  of  making  particular  kinds  of  money  a  legal 
tender  is  so  easily  abused  that  its  nature  and  effect  should  be 
well  understood.  When  properly  used  it  has  no  other  effect 
than  that  of  establishing  the  meaning  of  words.  As  it  is  nec- 
essary that  there  should  be  a  common  understanding  as  to  what 
shall  be  meant  by  "  one  foot,"  "one  acre,"  or  "one  gallon,"  BO 
a  similar  understanding  is  necessary  as  to  the  meaning  of  "one 
dollar."  As  the  law  prescribes  that  "  one  pound  "  shall  mean 
a  particular  weight,  so  it  prescribes  that  the  word  "  one  dollar  " 
shall  mean  a  certain  coin  issued  from  some  United  States  mint. 
During  the  Civil  "War,  however,  Congress  went  farther  and 
enacted  that  certain  paper  notes  issued  by  the  government 
should  be  a  legal  tender.  This  was  changing  the  meaning  of 
words,  because  the  word  dollar,  which  before  meant  a  piece  of 
gold,  now  meant  a  piece  of  paper.  Had  this  change  applied 
only  to  agreements  made  after  the  law  was  enacted,  it  would 
not  have  been  morally  wrong.  But  some  courts  decided  that 
it  should  apply  to  all  previous  contracts,  in  one  case  even  to  an 
expressed  contract  for  the  payment  of  gold  coin.  This  decision 
was  Jis  wrong  as  if  Congress  had  changed  the  size  of  the  bushel 
measure  and  the  courts  had  decided  that  old  contracts  for  the 
delivery  of  wheat  must  be  made  in  the  new  measure,  and  not 
in  that  understood  by  the  parties  when  they  made  the  contract. 


II.  68.]  OF  MONET.  153 

68.  The  Monometallic  and  Bimetallic  Systems.  In  some 
cases  only  one  of  the  precious  metals  is  made  into  coins  of  un- 
limited tender.  Thus  in  England  and  Germany  all  large  pay- 
ments can  be  required  by  the  creditor  to  be  made  in  gold  coin. 
Am6ng  oriental  nations,  especially  India,  China,  and  Japan, 
silver  has  very  generally  been  the  only  unlimited  legal  money. 

The  system  of  making  but  one  of  the  precious  metals  an 
unlimited  tender  is  called  monometallism. 

The  system  of  making  both  gold  and  silver  coins  an  unlim- 
ited tender  under  the  same  jurisdiction  is  called  bimetallism. 

Under  the  bimetallic  system  the  debtor  has  the  right  to  make 
his  payment  at  choice  in  either  of  the  two  precious  metals,  no 
matter  how  great  the  amount  may  be.  This  system  prevails 
with  some  modification  among  most  European  nations  except 
England  and  Germany,  but  with  certain  limitations  which  will 
hereafter  be  discussed.  In  the  United  States  sometimes  one 
and  sometimes  the  other  system  has  prevailed.  At  the  present 
time  we  have  a  modified  form  of  bimetallism,  which  will  be 
described  subsequently. 

The  system  of  pure,  or  unlimited,  bimetallism  is  as  follows : 
The  government  first  assumes  that  the  values  of  equal  weights 
of  the  two  precious  metals  have  a  certain  fixed  ratio  to  each 
other.  During  the  first  seventy  years  of  the  present  century 
the  value  of  an  ounce  of  gold  in  the  markets  of  the  world  was 
generally  nearly  equal  to  that  of  15£  ounces  of  silver.  Only 
on  rare  occasions  did  it  fall  below  15  or  rise  above  16.  Hence 
France  chose  15£  as  her  ratio.  Since  1834  the  ratio  adopted 
by  the  United  States  has  been  -16.  Tho  number  thus  estab- 
lished is  called  the  monetary  ratio. 

It  must  be  understood  that  this  does  not  mean  the  actual 
ratio  in  the  markets  of  the  world,  but  is  an  arbitrary  number, 
chosen  by  the  legislative  authorities  so  as  to  be  as  near  as  pos- 
sible to  what  they  supposed  would  be  the  market  ratio. 

Having  fixed  tho  ratio,  and  prescribed  the  weight  of  pure 
metal  in  each  coin  in  accordance  with  it,  the  mint  coins  all  the 
bullion  of  either  metal  brought  to  it  into  coins  of  unlimited 


154          DESCRIPTION  OF  THE  SOCIAL  ORGANISM.       [II.  69. 

legal  tender.  At  the  present  time  the  United  States  gold  dol- 
lar contains  23.22  grains  of  pure  gold,  while  the  silver  one  con- 
tains 371.25  grains  of  pure  silver.  The  coins,  however,  also 
contain  ten  per  cent  of  alloy,  so  that  the  actual  weights  are : 

The  gold  dollar 25.8  grains. 

The  silver  dollar 412.5  grains. 

The  three  essential  features  of  unlimited  bimetallism  are : 

I.  That  the  law  recognizes  no  difference  between  the  values 
of  its  gold  and  silver  coins. 

II.  The  mint  must  coin  into  dollars  all  of  each  kind  of 
metal  which  is  brought  to  it. 

III.  Each  metal  being  an  unlimited  tender,  a  debtor  may 
pay  his  debt  in  the  one  he  chooses. 

Difficulties  have  been  found  in  making  a  scheme  involving 
all  these  features  work  satisfactorily.  Hence  they  have  been 
modified  in  various  ways. 

69.  Limited  Bimetallism.  Between  the  years  1873  and 
1878  the  ratio  of  the  market  value  of  gold  to  that  of  silver  took 
an  extraordinary  rise,  and  has  for  several  years  past  not  differed 
much  on  the  average  from  18.  The  result  has  been  to  throw 
the  monetary  systems  of  those  nations  practising  bimetallism 
into  confusion.  The  system  temporarily  adopted  by  these 
nations  is  that  of  restricting  the  coinage  of  silver,  while  plac- 
ing no  limit  upon  that  of  gold.  This  restriction  applies  only 
to  the  quantity  coined,  and  not  to  the  legal-tender  quality  of 
the  silver  coins.  That  is,  a  debtor  can  pay  a  debt  of  any 
amount  in  silver  coins  if  he  can  find  them,  but  the  mint  will 
not  coin  them  for  him.  At  present  the  mints  of  the  United 
States  are  required  to  coin  not  less  than  two  millions  nor  more 
than  four  millions  of  silver  dollars  monthly.  But,  for  reasons 
which  cannot  be  well  understood  at  present,  the  government 
does  not  coin  these  dollars  for  the  owners  of  the  bullion,  but 
buys  the  bullion,  coins  it  on  its  own  account,  and  pays  these 
coins  out  to  the  public  creditors. 


II.  70.]  OF  MONET.  155 

At  the  time  of  sending  this  book  to  press  the  whole  ques- 
tion of  coinage  throughout  the  world  is  in  an  uncertain  and 

o  o 

confused  state,  owing  principally  to  the  extraordinary  change 
in  the  relative  market  values  of  gold  and  silver  which  has 
just  been  described,  and  owing  also  to  the  increasing  amount 
of  money  needed  to  transact  the  great  volume  of  business 
to  which  modern  production  has  given  rise.  The  desirable- 
ness of  an  international  system  of  coinage  is  widely  recog- 
nized, but  the  people  of  no  one  nation  are  fully  agreed  as  to 
what  is  the  best  system  even  for  themselves,  and  of  course  an 
international  arrangement  involves  yet  greater  difficulties. 

7O.  Subsidiary  Coinage.  The  system  of  monometallism 
does  not  imply  that  gold  coin  alone  shall  be  used,  but  only  that 
no  other  coin  shall  be  an  unlimited  tender.  Small  payments 
must  always  be  made  in  coins  of  other  substances,  because  gold 
coins  of  small  value  would  be  so  minute  as  to  be  liable  to  loss. 
Hence  all  governments  issue  coins  of  small  value,  which  are 
made  a  limited  legal  tender,  and  are  called  subsidiary  coins. 
The  metals  most  used  in  these  subsidiary  coins  are  silver, 
nickel,  and  copper.  To  prevent  them  from  being  melted 
down  as  bullion,  they  contain  less  than  their  nominal  value  of 
metal.  Thus  our  silver  quarter  dollar  weighs  only  96  grains 
instead  of  103  grains,  which  last  would  be  one  fourth  the 
weight  of  the  silver  dollar. 

If  the  coinage  of  this  subsidiary  money  were  free,  like  that 
of  gold,  every  one  who  got  his  silver  coined  into  quarter  dol- 
lars would  receive  in  coined  money  a  greater  nominal  value 
than  that  of  the  bullion  from  which  the  coin  was  made. 
Hence  the  practice  is  similar  to  that  adopted  in  the  case  of  our 
silver  dollar:  the  government  buys  the  silver  bullion  for  its 
small  coins,  makes  them  into  coins  of  the  prescribed  denomi- 
nations, and  offers  these  coins  in  exchange  for  those  of  unlim- 
ited legal  tender  at  their  face  values.  The  result  is  that  the 
public  take  what  are  wanted  for  small  payments,  and  no  more. 


156          DESCRIPTION  OF  THE  SOCIAL  ORGANISM.       [II.  71. 

71.  Volume  of  the  Currency.  By  currency  is  ordinarily 
meant  money  or  some  substitute  for  money  in  actual  circula- 
tion from  hand  to  hand.  One  of  the  most  important  mathe- 
matical conceptions  which  enter  into  economics  is  that  of  the 
total  volume  of  the  currency.  We  may  reach  it  in  various 
ways  which  are  nearly  equivalent  to  each  other.  Assuming,  as 
we  may,  that  the  quantity  of  coin  more  than  fifty  years  old 
actually  in  circulation  is  insignificant  in  amount,  we  may  add 
up  the  value  of  all  the  coins  issued  from  the  United  States  mint 
during  the  last  half-century.  We  shall  thus  have  a  sum  total 
from  which  all  the  coined  money  now  in  circulation  must  have 
come.  If  we  subtract  from  this  sum  total  all  the  coin  that  has 
been  melted  down,  all  that  is  now  in  foreign  countries,  and  all 
that  is  lying  idle  in  the  vaults  of  the  banks  or  of  the  Treasury, 
we  shall  have  a  balance  showing  the  coin  in  circulation.  This 
balance  is  the  volume  of  the  currency  so  far  as  coin  is  con- 
cerned. 

But  we  may  commence  at  the  other  end  of  the  line  by  con- 
sidering the  money  which  is  in  every  man's  pocket.  If  we 
could  at  midnight  on  any  day  demand  and  obtain  from  every 
individual  and  corporation  in  the  country  a  statement  of  the 
amount  of  coin  money  in  actual  possession  of  such  person,  we 
should  have  a  definite  sum  total.  It  is  evident  that  this  sum 
total  would  change  very  slowly  from  day  to  day,  and  even 
from  year  to  year.  The  only  effect  of  payments  would  be  that 
one  man  would  have  a  great  deal  more  and  another  man  a 
great  deal  less  on  different  days.  Only  when  money  was 
melted  down,  sent  out  of  the  country,  or  stored  away  in  vaults, 
or  as  new  coin  was  issued,  would  there  be  changes  in  the  sum 
total. 


II.  72.]  BANKS  AND  CREDIT-HONEY.  157 


CHAPTER  XIL 

BANKS    AND   CREDIT-MONEY. 

72.  WE  suppose  the  reader  to  have  clearly  in  mind  what 
has  been  said  in  §§  4r-6  on  the  relation  of  wealth  to  its  owner. 
When  we  study  the  operations  of  business  we  see  that  although 
in  most  cases  the  wealth  one  possesses  is  a  definite  existing 
object,  such  as  a  house,  a  table,  or  a  field  of  wheat,  yet  in 
other  cases  the  wealth  is  not  definite.  For  example,  I  agree 
with  a  cabinet-maker  that  he  shall  make  me  a  table  and  de- 
liver it  next  week.  I  may  then  consider  myself  in  a  certain 
sense  the  owner  of  that  table,  although  it  has  no  existence  and 
may  possibly  never  come  into  existence.  Again,  in  the  sale 
of  commodities  in  the  market,  it  rarely  happens  that  pay- 
ment is  made  at  the  time  of  the  sale.  In  this  case  what  the 
seller  receives  for  his  commodity  is  not  money,  but  the  right 
to  demand  money  at  some  future  time.  But  he  considers  him- 
self the  owner  of  that  much  money  as  completely  as  if  he  had 
it  in  his  safe,  and,  for  economic  purposes,  we  may  consider  this 
imaginary  money,  which  he  is  to  get  at  some  future  time,  as  a 
part  of  his  wealth.  Legally,  however,  the  creditor  is  con- 
sidered, not  as  the  owner  of  wealth,  but  as  the  possessor  of  a 
right,  namely,  the  right  to  demand  from  his  debtor  the  pay- 
ment of  the  money,  and  to  enforce  this  payment  by  legal 
measures.  This  right  to  require  the  payment  of  money  from 
another  person  is  called  credit. 

To  prevent  confusion  we  must  carefully  distinguish  this 
meaning  of  the  word  credit  from  the  analogous  and  common 
meaning  of  good  business  standing.  When  we  say,  "That 
man's  credit  is  good,"  we  use  the  word  in  a  different  sense 
from  the  economic  one.  In  the  latter  sense  a  man's  credits  are 


158  DESCRIPTION  OF  THE  SOCIAL  ORGANISM.        [II.  73. 

simply  the  sum  total  of  the  moneys  which  others  owe  to  him, 
and  have  nothing  to  do  with  his  character  or  standing. 

Transfer  of  Credit.  A  creditor  may  transfer  his  rights  to 
other  legal  persons  on  the  same  principles  by  which  he  trans- 
fers the  ownership  of  wealth.  The  transferee  then  takes  his 
place  as  the  possessor  of  the  right  in  the  way  pointed  out  in 
II.  9.  The  methods  and  forms  of  transfer  vary  with  the  nat- 
ure of  the  credit.  Commonly,  any  piece  of  writing  clearly 
indicating  the  transfer  of  the  right,  and  duly  signed  by  the 
party  transferring,  is  sufficient. 

73.  How  Banks  Arise.  In  a  primitive  state  of  society 
every  payment  of  money  is  made  by  the  payer  actually  deliv- 
ering the  money  into  the  hands  of  the  payee.  In  modern 
mercantile  operations  this  transaction  would  involve  a  heavy 
tax  upon  the  resources  of  the  community  Large  sums  in  pos- 
session of  the  owner  would  be  in  danger  of  being  lost,  stolen, 
or  burnt.  Serious  danger  of  loss  and  theft  would  be  incurred 
in  the  transportation  of  money  from  the  office  of  the  payer  to 
that  of  the  payee.  Doubts  and  disputes  about  the  amount 
actually  paid,  or  the  amounts  in  the  possession  of  individuals, 
would  frequently  arise. 

A  little  consideration  will  show  us  that  in  most  payments 
the  delivery  of  the  money  is  not  necessary.  Since  only  the 
ownership  of  the  money  is  changed  by  the  payment,  and 
since,  as  a  general  rule,  the  payee  only  wants  the  ownership 
in  order  that  he  may  transfer  it  to  some  other  person,  it  fol- 
lows that  all  the  requirements  of  exchange  will  be  fulfilled  if 
the  money  is  stored  where  he  can  get  possession  of  it  in  case  he 
wants  it,  provided  a  system  of  transferring  the  ownership  can 
be  devised.  Thus,  all  the  inhabitants  in  a  town  may  keep 
their  money  deposited  in  some  one  place,  and  make  payments 
by  transfers  of  ownership  in  such  form  as  might  be  mutually 
agreed  upon.  Such  is  the  basis  of  the  banking  system  now 
prevalent  in  all  civilized  communities. 

A  bank   may  be  defined  as  primarily  a  place  in  which 


IL  74.]  BANKS  AND  CREDIT-MONET.  159 

money  is  deposited  for  safe-keeping.  It  has,  indeed,  more  com- 
plicated functions,  but  they  will  be  best  understood  by  start- 
ing from  this  first  and  most  simple  function  of  all.  Let  us 
then  begin  by  considering  the  case  of  a  town  the  inhabitants 
of  which  deposit  all  their  money  for  safe-keeping  in  a  single 
bank,  and  make  all  payments  among  themselves  by  transferring 
the  ownership  of  the  money.  Such  an  institution  is  called  a 
bank  of  deposit,  and  the  moneys  in  it  are  called  deposits.  It 
is  obvious  that  the  total  amount  of  deposits  at  any  time 
would  be  the  sum  total  of  all  the  moneys  owned  by  each  in- 
dividual of  the  community  at  that  time.  It  would  therefore 
represent  the  volume  of  the  currency  so  far  as  the  town  was 
concerned  (§  71). 

74.  Bank  Deposits  and  Cheques.  From  what  has  been 
said  of  the  dual  character  of  financial  transactio-ns  and  obliga- 
tions, it  will  be  seen  that  the  deposits  appear  to  the  managers 
of  the  bank  under  two  aspects. 

I.  As  liabilities  or  obligations  of  the  bank.     By  this  is 
meant  the  obligation  of  the  bank  to  pay  to  each  or  any  de- 
positor the  amount  of  his  deposit  whenever  required.     Of 
course  the  sum  total  of  liabilities  is  in  this  case  equal  to  the 
sum  total  of  the  deposits. 

II.  As  resources  of  the  bank.     The  resources  would  in  this 
case  be  the  coin  in  possession  of  the  bank,  and  would  con- 
stitute the  fund  which  enables  the  bank  to  satisfy  its  liabili- 
ties.   So  long  as  the  bank  engaged  in  no  other  transactions  than 
those  which  we  have  described,  the  resources  and  liabilities 
would  remain  equal.     Of  course  there  is  no  physical  necessity 
for  this  equality,  since  the  coin  might  be  stolen  without  less- 
ening the  liability  of  the  bank.     But  the  balance  can  always 
be  produced  by  suitably  accounting  for  any  deficiency,  so  long 
as  the  accounts  of  the  bank  are  kept  in  order. 

A  statement  of  the  condition  of  the  bank  at  the  close  of 
business  on  any  one  day  would  then  be  in  a  form  like  the  fol- 
lowing : 


160          DESCRIPTION  OF  TIIE  SOCIAL  ORGANISM.       [II.  76. 

RESOURCES.  LIABILITIES. 

Cash  in  vaults  (coin) $25,000    John  B.  Smith,  Creditor $500 

William  Jones 1,250 

Samuel  Rhett 850 

Etc.,  etc.,  etc.  


Total  liabilities  (deposits).  .$25,000 

75.  Cheques.  The  ownership  of  money  in  a  bank  is  trans- 
ferred by  an  instrument  in  writing  called  a  cheque.  The 
drawer  of  the  cheque  is  an  owner  of  money  deposited  who 
wishes  to  transfer  that  ownership  to  another  person.  The 
drawee  is  the  person  to  whom  the  transfer  is  made.  The 
usual  form  of  a  cheque  is  the  following  : 

NEW  YORK,  June  30, 1885. 
EXCHANGE  NATIONAL  BANK, 
Pay  to  Samuel  Rhctt  [drawee]  or  order 
($910)  Nine  hundred  and  ten  dollars. 

WILLIAM  JONES  [drawer], 

By  this  instrument  $910  of  the  right  of  "William  Jones  to 
his  deposit  in  the  bank  is  transferred  to  Samuel  Rhett,  whose 
right  is  increased  by  the  same  amount.  When  Rhett  presents 
the  cheque  at  the  bank  his  credit  is  increased,  and  Jones's  is 
diminished  by  this  amount.  Thus  the  cheque  appears  in  its 
dual  aspect  as  an  increase  of  one  man's  credit  and  a  diminution 
of  another's,  which  cancel  each  other,  leaving  the  sum  total  at 
$25,000  as  before. 

76.  Transfer  of  Cheques.  By  long-established  mercantile 
usage  the  drawee  may  transfer  the  right  given  him  by  the 
cheque  to  any  other  person,  this  person  to  another,  and  so  on 
indefinitely,  by  suitable  indorsements  on  the  back  of  the 
cheque.  This  right  is  expressed  by  the  words  "  or  order"  which 
mean  his  order  or  that  of  any  party  whom  he  may  designate. 
Thus  the  ownership  may  pass  from  hand  to  hand  like  that  of 
money 


II.  78.]  BANKS  AND  CREDIT-MONEY.  161 

77.  Individual  Accounts.     If  to  the  total  deposits  of  any 
customer  last  night  be  added  all  the  cheques  in  his  favor  which 
lie  has  deposited  to-day,  and  from  the  sum  be  subtracted  the 
cheques  he  has  drawn  to-day,  the  remainder  will  be  his  deposit 
to-night ;  that  is,  it  will  express  his  share  of  the  money  held 
by  the  bank.     In  mercantile  usage  the  subtractive  quantity  is 
transferred  to  the  other  side  of  the  equation,  which  thus  be- 
comes credit  yesterday  plus  cheques  since  deposited  equals 
cheques  drawn  plus  credit  to-night.     Thus  the  amount  may  be 
balanced  every  day. 

Variations  of  Sum,  Total  of  Deposits.  In  the  case  so 
far  supposed,  so  long  as  no  party  in  town  made  payments 
to  parties  outside,  or  received  payments  from  parties  outside, 
the  total  amount  of  the  deposits  would  remain  unchanged. 
The  only  varying  quantities  would  be  the  individual  amounts 
owned  by  each  depositor;  and  the  additions  would  in  all  cases 
balance  the  diminutions.  But  when  a  depositor  had  to  make  a 
payment  abroad,  he  would  have  to  withdraw  his  money  for  that 
purpose.  Thus  the  sum  total  would  be  diminished  by  all  pay- 
ments made  by  the  townspeople  to  persons  outside.  When 
a  depositor  receives  money  from  parties  outside  he  deposits  it  in 
the  bank,  and  the  sum  total  is  then  increased  by  the  amount  so 
received.  Thus  the  sum  total  would  fluctuate  according  as  the 
payments  in  one  direction  or  the  other  were  in  excess,  and  the 
state  of  the  bank  from  day  to  day  would  be  the  index  of  the 
balance  of  trade  of  the  town  with  the  world  outside. 

78.  Capital  of  the  Bank.     That  perfect  solvency  which 
has  just  been  described  would  depend  on  the  bank's  meeting 
with   no   losses.      Since  all  mercantile  transactions  are   now 
and   then   liable  to  loss,   it  is   necessary   that    the   bank,   in 
order  perfectly  to  secure  the  depositors  whose  money  is  loaned, 
should  have  a  guarantee  capital.     This   capital  is  a  fund  sub- 
scribed or  paid  in  by  the  stockholders  of  the  bank,  who  thus 
become  the  owners  of  its  rights.     The  capital  thus  paid  in  ap- 
pears again  on  both  sides  of  the  statements  of  the  bank. 

ii 


162          DESCRIPTION  OF  THE  SOCIAL  ORGANISM.       [II.  79. 

As  a  liability  it  expresses  the  sum  which,  in  case  the  bank 
stopped  business,  it  would  have  to  return  to  its  individual 
stockholders.  As  a  resource  it  is  expressed  by  this  additional 
amount  of  cash  in  the  vaults  of  the  bank.  If  a  capital  of 
$15,000  were  paid  in  to  our  supposed  bank,  its  statement  would 
then  appear  in  the  following  form  : 

RESOURCES.  LIABILITIES. 

Cash  in  vault $40,000    Due  depositors $25,000 

Capital  stock 15,000 

$40,000 

This  statement  means  simply  that  out  of  $40,000  cash  in 
the  vaults,  $25,000  belongs  to  depositors,  and  $15,000  to  the 
stockholders. 

79.  Discount  Functions  of  the  Bank.  The  cost  of  man- 
aging such  a  bank  as  we  have  described  would  have  to  be  paid 
by  its  customers,  since  we  have  assigned  it  no  business  by 
which  it  could  make  a  profit.  Having  in  its  possession  all 
the  coin  owned  by  the  town,  the  bank  would  find  a  certain 
sum  lying  idle  in  its  vaults  from  year  to  year  and  from  gener- 
ation to  generation.  For  although,  as  we  have  just  shown, 
the  sum  of  the  deposits  would  fluctuate  according  to  the  state 
of  trade  with  the  outside  community,  yet  in  practice  these 
fluctuations  would  be  slight.  Although  the  individual  may  and 
often  does  pay  out  all  the  money  he  has  got,  the  community 
at  large  never  does.  If  the  average  amounts  of  deposits  were, 
as  we  have  supposed,  $25,000,  it  might  be  found  that  they  oc- 
casionally went  as  high  as  $30,000,  and  might  perhaps  from 
time  to  time  fall  as  low  as  $20,000.  Of  course  no  numerical 
rule  for  the  limits  can  be  set  in  practice.  But  the  actual  fluc- 
tuations are  found  to  be  of  this  order  of  magnitude.  Thus  the 
sum  idle  forever  in  the  vaults  of  the  bank  might  be  fixed  at 
$20,000  plus  the  capital,  making  $35,000  in  all.  Now  the  bank 
could  loan  this  money  out  at  interest  without  any  danger  of  its 
being  unable  to  fulfil  its  engagements;  and  this  for  two  reasons: 


II.  79.]  BANKS  AND  CREDIT-MONET.  163 

in  the  first  place,  as  business  goes,  it  would  not  be  called  upon 
by  the  depositors  of  the  money  loaned  to  pay  it ;  and  in  the 
second  place,  if  it  ever  should  be  called  upon,  it  could  get  the 
money  by  demanding  payment  from  the  borrowers.  Hence 
so  long  as  the  loans  were  well  secured  the  solvency  of  the  bank 
would  be  unimpaired. 

The  result  of  this  policy  would  be,  that  instead  of  the  insti- 
tution being  a  custodian  of  money,  it  would  become  a  lonwwer, 
bound  to  repay  the  money  on  demand,  but  at  liberty  to  loan  it 
out  as  long  as  the  depositor  does  not  demand  it.  The  deposit 
then  becomes  a  credit  simply,  and  the  depositor,  instead  of 
being  the  owner  of  money  ^  is  the  possessor  of  a  right,  namely, 
the  right  to  require  money  from  the  bank  and  enforce  its 
payment. 

Now,  by  the  hypothesis  just  made,  suppose  that  there  is  in 
the  vaults  of  the  bank  a  cash  sum  of  $20,000,  which  lies  there 
unused  year  after  year  and  generation  after  generation,  and  an 
additional  sum  of  $15,000  paid  in  by  the  stockholders.  This 
makes  a  sum  of  $35,000  which  the  bank  can  loan  out  at  inter- 
est without  any  danger  of  being  unable  to  meet  its  obliga- 
tions on  demand.  Then  all  residents  of  the  town  who  want  to 
borrow  money  can  go  to  the  bank  and  secure  loans  until  the 
whole  $35,000  is  thus  borrowed.  For  each  sum  borrowed  the 
borrower  gives  his  promissory  note,  which  in  banking  practice 
is  usually  payable  in  one,  two,  or  three  months. 

The  very  same  reason  which  originally  prompted  the  de- 
positors to  place  their  money  in  the  bank  will  now  prompt  the 
borrowers  to  deposit  their  loans,  and  to  make  such  transfers  as 
they  desire  by  cheques  upon  the  bank.  When  these  loans  are 
all  effected,  and  the  deposits  made,  the  state  of  the  bank  is  as 
follows : 

The  amount  of  cash  in  the  vaults  remains  the  same  as  before, 
$40,000,  since  all  borrowed  has  been  re-deposited. 

The  amount  due  depositors  is  increased  by  $40,000,  which 
they  have  borrowed  and  immediately  deposited. 


164  DESCRIPTION  OF  TUB  SOCIAL  ORGANISM.       [II.  80. 

This  amount  is  balanced  by  $40,000  in  promissory  notes 
from  the  borrowers,  payable  in  one,  two,  or  three  months. 

The  promissory  notes  represent  moneys  collectible  by  the 
bank  and  applicable  to  the  liquidation  of  its  liabilities.  Hence 
the  statement  of  the  bank  will  now  be  as  follows  : 

RESOURCES.  LIABILITIES. 

Cash  in  vaults $40,000    Capital  stock $15,000 

Prom,  notes  (discounts) ....     85,000    Due  depositors  ...   60,000 

Total  resources $75,000        Total  liabilities $75,000 

This  means  that  of  the  cash  on  hand  and  debts  due,  amount- 
ing in  all  to  $75,000,  $15,000  belongs  to  the  stockholders  and 
$60,000  is  due  depositors. 

8O.  We  now  have  a  state  of  things  which  may  almost  seem 
paradoxical,  and  which  is  a  frequent  source  of  confusion  to  those 
not  familiar  with  business.  The  inhabitants  of  the  town  con- 
sider that  they  have  altogether  $60,000  in  money  in  bank,  and 
yet  there  exists  only  $40,000  in  money  all  told.  They  are 
therefore,  in  a  certain  sense,  the  possessors  of  money  which  has 
no  real  existence.  There  is,  however,  nothing  more  confusing 
in  this  than  that  a  man  should  be  the  owner  of  a  table  which 
is  not  yet  made,  but  which  the  maker  has  agreed  to  finish  and 
deliver  next  week,  or  that  he  should  be  the  owner  of  a  house 
which  a  contractor  has  agreed  to  build.  In  fact  he  is  not  the 

o 

owner  of  money,  but  the  possessor  of  credit,  which,  as  already 
explained,  is  merely  a  debt  from  the  bank.  But  this  credit 
serves  all  the  purposes  of  money,  and  may  be  used  in  making 
exchanges,  exactly  as  if  it  were  gold  and  silver. 

Since  each  depositor  counts  himself  the  possessor  of  so  much 
money  in  the  bank,  it  follows  that  the  total  volume  of  the  cur- 
rency is  now  $60,000.  We  therefore  reach  the  conclusion  that 
the  volume  of  currency  in  circulation  may  include  not  only 
material  money,  but  credit,  expressed  by  nothing  more  than 
figures  written  in  the  books  of  a  bank.  In  other  words,  when  a 
customer  goes  to  a  bank,  gives  his  promissory  note  for  $1000, 


II.  81.]  BANKS  AND   CRED1T-MONET.  165 

and  has  the  figures  $1000  written  on  the  credit  side  of  his  ac- 
count, thereby  giving  him  the  right  to  draw  cheques  for  that 
amount,  an  addition  of  $1000  is  made  to  the  total  volume  of 
the  effective  currency.  By  effective  currency  we  mean  that 
which  can  be  used  in  payment. 

Since  all  the  money  borrowed  has  been  deposited,  there  still 
remains  the  same  amount  in  cash  in  the  vaults  of  the  bank. 
But  this  amount  will  fluctuate  yet  more  than  before,  owing  to 
the  number  of  persons  who  may  make  or  receive  payments  to 
or  from  the  rest  of  the  world.  Still  it  would  probably  be 
found  that  the  amount  would  never  fall  below  $30,000.  This 
sum  could  again  be  loaned  out  to  customers,  and  if  they  de- 
posited it,  it  could  be  loaned  again,  and  so  on  indefinitely.  Thns 
we  cannot  set  any  mathematical  limit  to  the  volume  of  the  credit 
currency  which  the  bank  may  have  in  circulation  through  the 
cash  in  its  vaults.  But  with  every  increase  in  this  volume 
there  would  be  an  increase  in  the  fluctuations  arising  from  trade, 
so  that  a  limit  of  safety  would  be  soon  reached.  The  national 
banking  law  of  the  United  States  sets  the  limit  at  25  per  cent 
of  the  current  liabilities,  but  of  course  the  bank  must  seek  to 
keep  its  cash  a  little  above  that  limit.  In  the  case  supposed, 
when  the  bank  had  approached  the  safe  limit  to  the  amount  of 
its  loans,  its  statement  would  be  in  this  form : 

RESOUKCES.  LIABILITIES. 

Cash  in  vaults $40,000    Capital  stock $15,000 

Prom,  notes  (discounts) 120,000    Due  depositors 145,000 

Total  resources $160,000        Total  liabilities $160,000 

81.  Bank  Circulation.  It  often  happens  that  the  deposi- 
tor or  borrower  desires  to  make  payment  without  the  formality 
of  drawing  and  signing  a  cheque.  The  bank  may  then,  in 
making  him  a  loan,  issue  its  own  promissory  note,  payable  on 
demand.  Thus  arises  the  familiar  bank-note.  This  transac- 
tion will  consist  in  the  simple  exchange  of  credit  between  the 
individual  and  the  bank.  The  individual  gives  the  bank  his 


166          DESCRIPTION  OF  THE  SOCIAL  ORGANISM.       [II.  82. 

promissory  note,  payable  with  interest  at  some  future  time,  and 
in  return  receives  from  the  bank  its  own  promissory  note,  pay- 
able on  demand  without  interest.  If  now  we  suppose  our 
bank  to  issue  notes  in  this  way  to  the  sum  of  $10,000,  its 
statement  will  be  as  follows : 

RESOURCES.  LIABILITIES. 

Cash  iu  vaults. $40,000    Capital  stock $15,000 

Prom,  notes  (discounts) 130,000    Due  depositors 145,000 

Circulation 10,000 


Total  resources $170,000        Total  liabilities $170,000 

At  this  point  we  may  notice  one  of  those  singular  mistakes 
which  frequently  influence  the  views  and  actions  of  masses 
of  men,  although  in  direct  conflict  with  facts  which  would 
be  well  known  would  men  only  attend  to  them.  This  error 
is  the  belief  that  the  main  function  of  a  bank  is  to  issue  cir- 
culating notes.  It  may  be  questioned  whether  this  function 
should  be  considered  a  legitimate  one  of  any  bank,  and  as  a 
matter  of  fact  the  large  majority  of  the  banking  firms  of  the 
world  do  not  issue  such  notes.  Public  or  incorporated  banks 
generally,  but  not  universally,  issue  them.  We  shall  hereafter 
see  reason  to  believe  that  if  no  such  thing  as  a  bank-note  for 
general  circulation  had  ever  been  thought  of,  the  world  would 
not  have  been  any  worse  off. 

82.  Ulterior  Development  of  the  Hank.  The  transactions 
which  we  have  described  complete  those  which  necessarily  per- 
tain to  the  business  of  conducting  the  bank.  In  practice,  how- 
ever, there  is  yet  further  development  in  various  ways.  In 
the  first  place,  instead  of  all  the  business  men  of  the  town 
keeping  their  money  in  one  bank,  there  are  frequently  a  great 
number  of  banks.  The  result  is  that  when  a  payment  is  made 
by  cheque  it  will  happen  in  a  large  majority  of  cases  that  the 
payee  does  not  himself  keep  an  account  in  the  bank  on  which 
the  cheque  is  drawn,  but  in  some  other  bank.  Then,  instead 
of  sending  himself  to  the  bank  to  get  his  cheque  cashed,  he 


II.  83.]  BANKS  AND  CREDIT-MONEY.  167 

hands  it  to  his  own  bank,  authorizing  the  latter  to  collect  it  by 
indorsing  his  name  on  the  back.  The  result  is  that  in  the 
course  of  the  day  the  various  banks  of  the  city  will  have  a  col- 
lection of  cheques  drawn  against  each  other. 

Now  if  we  take  the  sum  total  of  all  the  cash  in  the  banks 
of  the  city,  it  will  remain  true  (leaving  out  the  exceptional 
cases  where  parties  withdraw  cash  to  make  payments)  that  the 
sum  total  will  vary  only  in  consequence  of  payments  to  par- 
ties outside  the  city.  But  when  the  cheques  drawn  upon  each 
other  are  presented,  each  bank  is  obliged  to  pay  in  cash  all 
drawn  upon  itself,  and  has  the  right  to  collect  in  cash  all  held 
for  payment  by  other  banks.  The  cash  in  the  vaults  of  any  one 
bank  will  then  increase  or  diminish  according  as  the  cheques 
deposited  with  it  are  in  excess  of  or  below  those  drawn  upon 
it.  Still,  as  business  ordinarily  goes,  it  will  frequently  happen 
that  these  amounts  closely  balance  each  other. 

As  business  goes  on,  the  accounts  of  the  resources  and  liabil- 
ities of  the  bank  become  more  complex.  The  statement  can 
be  balanced  at  any  time  by  calculating  the  conditions  if  the 
bank  should  at  that  moment  wind  up  all  its  business  and  dis- 
solve. Its  resources  would  then  consist  of  all  the  property 
which  it  possessed  and  all  the  debts  due  to  it,  in  whatever 
shapes  they  might  be.  Ideally  we  conceive  that  this  whole 
sum  is  put  into  cash.  The  liabilities  would  then  consist  essen- 
tially of  the  statement  what  would  be  done  with  this  cash. 
In  the  first  place,  the  depositors  and  holders  of  notes  would  all 
have  to  be  paid  off..  Then  other  creditors  would  have  to  be 
paid,  the  capital  stock  would  have  to  be  made  good,  and  the 
balance  would  be  divisible  pro  rata  among  the  stockholders  as 
accrued  profits.  It  must  also  be  remembered  that,  in  the  state- 
ments published  by  the  banks,  the  cash  on  hand  and  debts  due 
are  divided  up  under  a  number  of  separate  heads,  instead  of 
beirisr  combined  into  one  sum  total.  These  little  details  are, 

o  * 

however,  of  slight  economic  importance,  and  all  that  is  essen- 
tial for  the  student  is  to  understand  the  nature  of  the  large 
amounts  which  pertain  to  the  conduct  of  the  business. 


168          DESCRIPTION  OF  THE  SOCIAL  ORGANISM.        [II.  83. 


CHAPTER  XIII. 

ORGANIZATION   OF  BANKS   IN   DETAIL. 

83.  THE  system  of  banking,  as  described  in  the  preceding 
chapter,  is  subject  to  a  weakness  dealing  with  which  is  the 
most  intricate  problem  connected  with  the  subject.  The 
source  of  weakness  is  this :  the  bank,  in  order  to  make  any 
profit,  must  always  have  upon  its  books  credits  payable  on 
demand  (that  is,  deposits  and  circulating  notes)  to  an  amount 
greater  than  it  has  the  cash  on  hand  to  pay  with.  The  result 
is  that  if  everybody  having  money  in  the  bank  should  de- 
mand immediate  payment,  the  bank  could  not  fulfil  its  obliga- 
tions, and  would  be  obliged  to  postpone  payment  and  suspend 
business.  But  this  suspension  would  not  imply  any  lack  of 
ability  to  make  good  its  obligations  in  the  course  of  time. 
Excluding  such  abnormal  cases  as  those  arising  from  defalca- 
tion, robbery,  bad  debts,  etc.,  every  bank  has  on  hand  not  only 
cash,  but  the  promissory  notes  of  its  customers;  and  these  two 
items,  as  already  shown,  must,  in  the  normal  case,  equal  or  ex- 
ceed the  deposits  and  capital  combined.  A  well-conducted 
bank  has  generally  a  large  reserve  fund  in  addition  to  what 
would  make  good  its  capital  and  deposits. 

Let  us  see  the  consequences  of  a  continued  demand  upon  a 
bank  for  the  payment  of  its  debts,  called  in  common  language 
a  "  run."  Suppose  the  run  to  be  upon  the  bank  whose  condi- 
tion is  described  in  §  81.  It  has  on  deposit  or  in  circulation 
the  sum  of  $155,000 ;  that  is  to  say,  it  has  credit  to  this  amount 
circulating  as  money  through  the  medium  of  cheques  and 
notes,  and  forming  this  amount  of  the  currency  of  the  com- 
munity. Suppose  now  that  the  owners  of  this  whole  $155,000 
come  day  after  day  to  demand  payment,  while  no  others  de- 
posit money  in  their  places.  The  bank  having  cash  to  the 


II.  83.]          ORGANIZATION  OF  BANKS  IN  DETAIL.  169 

amount  of  $40,000  can  redeem  tins  amount  of  its  indebtedness. 
But  there  will  still  be  $115,000  outstanding.  In  order  to  meet 
this  indebtedness  it  must  refuse  to  discount  any  more  notes,  and 
must  require  the  payment  of  all  those  which  it  holds,  as  fast  as 
they  become  due.  As  the  payments  come  in  they  can  be  ap- 
plied to  the  redemption  of  the  indebtedness  until  the  whole 
$115,000  remaining  is  paid.  This  will  still  leave  $15,000  out 
of  the  $130,000  of  notes  discounted,  and  this  money  will  be- 
long to  the  stockholders  as  capital.  The  final  result  of  the  run 
will  be  as  follows : 

I.  A  diminution  of  $115,000  in  the  volume  of  the  currency 
circulating  in  the   community.     Instead  of  $145,000  in  bank 
credits  and   $10,000  in  bank-notes,  there  is   now  circulating 
$40,000  in  coin,  just  as  if  the  bank  had  never  been  organized. 

II.  The  bank  will  during  a  period  of  several  months  have 
been  obliged  to  refuse  to  loan  any  money  to  its  customers,  and 
thus  many  of  the  latter,  failing  of  their  expected  loans,  will  be 
unable  to  pay  their  debts. 

These  two  evils  will  tend  to  aggravate  each  other,  since, 
owing  to  the  diminution  in  the  volume  of  the  currency,  not 
only  the  ability  of  the  merchants  to  borrow  from  the  banks, 
but  to  borrow  from  other  people,  will  be  diminished.  So  long 
as  a  man  has  a  considerable  deposit  in  the  bank  he  is  in  a  much 
better  position  to  loan  money  than  when  he  has  only  a  small 
quantity  of  coin  on  hand.  The  general  result  will  be  what  is 
called  a  "commercial  panic,"  or  a  general  inability  on  the  part 
of  large  numbers  of  the  community  to  pay  their  debts. 

But  this,  be  it  remembered,  results,  not  from  any  inherent 
necessity  of  the  case,  but  because  the  customers  of  tiie  bank, 
either  from  loss  of  confidence  or  from  any  other  reason  what- 
ever, have  determined  to  withdraw  their  balances.  So  long  as 
general  confidence  is  felt  in  the  bank  there  is  no  danger  of  a 
run  upon  it.  The  state  of  mind  of  the  ordinary  depositor  has 
been  facetiously  expressed  in  the  form  :  "  If  you  can  pay  me 
my  money,  I  do  not  want  it ;  but  if  you  cannot  pay  me,  then  I 
must  have  it."  The  reason  why  a  general  run  upon  banks  ie 


170          DESCRIPTION  OF  TUB  SOCIAL  ORGANISM.       [II.  84. 

never  to  be  feared  under  ordinary  conditions  is  that  there  can 
be  no  occasion  for  it.  The  depositor  can  generally  make  his 
ordinary  payments  in  his  own  community  by  cheque  as  easily 
as  by  money ;  and  even  if  he  must  withdraw  his  money  to 
make  the  payment,  the  chances  are  that  the  payee  will  re- 
deposit  it  in  the  same  bank  or  in  some  other  bank.  The  ex- 
ceptional cases  arise  when  he  is  to  make  a  payment  in  some 
other  place,  or  when  he  wants  the  gold  or  silver  coin  to  use  for 
some  other  purpose  than  paying  it  out. 

The  reader  must,  however,  be  on  his  guard  against  the  popu- 
lar illusion  that  these  exceptional  cases  can  never  arise  except 
from  distrust  of  the  bank.  Such  would  indeed  be  the  case  if 
no  one  ever  wanted  money  except  to  pay  out  within  the  sphere 
of  operations  of  the  bank.  But  experience  shows  that  if  banks 
act  on  this  supposition  by  increasing  their  credits,  their  deposi- 
tors will  come  demanding  coin  for  foreign  export,  or  to  melt 
down  for  manufacturing  purposes.  "We  shall  hereafter  see  that 
the  facility  with  which  coin  can  be  exported  operates  like  a 
safety-valve  to  stop  an  undue  expansion  of  bank  credit.  The 
banks  themselves  keep  each  other  in  check  by  requiring  the 
prompt  payment  of  all  cheques  which  they  hold  against  each 
other. 

84.  On  the  other  hand,  there  always  exists  a  greater  or  less 
tendency  towards  an  increase  of  the  discounts  and  deposits  of 
a  bank.  Men  of  business  continually  want  to  borrow  money, 
provided  the  rate  of  interest  is  not  too  high  ;  they  therefore  go 
to  the  banks  for  loans.  But  instead  of  taking  the  loans  out  as 

o 

cash,  they  commonly  leave  them  on  deposit,  and  make  their 
payment  by  cheques.  In  such  cases  there  is  a  simple  exchange 
of  indebtedness,  the  bank  acknowledging  the  indebtedness  to 
the  customer  on  demand,  while  the  latter  gives  his  note  for 
the  same  sum  payable  with  interest  at  a  future  time.  When 
business  is  brisk  and  merchants  see  good  opportunities  for 
profit  by  enlarging  their  operations,  they  naturally  go  to  their 
banks  for  discounts,  thus  creating  a  demand  for  money,  or,  to 


II.  85.]          ORGANIZATION  OF  BANKS  IN  DETAIL.  171 

speak  more  accurately,  for  bank  credits.  In  order  to  avoid  too 
great  an  extension  of  this  credit,  the  bank  raises  its  rate  of  in- 
terest, thus  discouraging  the  applications  of  those  borrowers 
who  do  not  expect  to  make  a  profit  to  justify  the  increased 
rate.  "When  business  is  dull  the  opposite  effects  take  place :  the 
merchants  pay  off  their  notes  instead  of  letting  them  continue 
at  interest,  and  the  bank  must  lower  its  rate  of  interest  in  order 
to  attract  borrowers. 

85.  Since  all  the  profits  which  banks  can  pay  their  stock- 
holders are  derived  from  the  interest  on  the  moneys  loaned, 
and  since  all  the  coin  in  the  vaults  is  so  much  dead  capital 
drawing  no  interest,  there  is  a  certain  tendency  on  the  part  of 
banks  to  make  the  largest  loans  on  the  smallest  available  cash 
reserve.  How  far  this  temptation  will  be  yielded  to  depends 
upon  the  good  management  and  soundness  of  the  bank,  the 
general  financial  state  of  the  community,  and  the  laws  which 
govern  banks.  In  new  countries,  where  the  rate  of  interest  is 
high  and  the  demand  for  loans  great,  the  temptation  is  much 
stronger  than  elsewhere.  Thus  arose  the  "  wild-cat  banking" 
which  was  so  prevalent  in  our  new  States  during  their  early 
history.  When  a  "  wild-cat"  bank  was  established,  its  practice 
was  to  loan  its  own  notes  on  interest.  The  banker  knew  that 
there  was  little  immediate  danger  of  these  notes  coining  back 
in  great  numbers,  because  the  community  was  too  much  in 
want  of  them  as  money.  He  was  therefore  tempted  to  loan 
them  on  insufficient  security,  especially  as  good  security  was 
difficult  to  obtain  under  the  circumstances.  If  he  could  in- 
duce his  customer  to  carry  the  notes  to  a  great  distance,  the 
danger  of  their  being  returned  for  payment  became  still  less. 
So  long  as  people  would  take  his  notes,  he  was  thus  enabled  to 
draw  a  high  rate  of  interest  on  a  very  small  capital.  When 
his  notes  finally  returned  for  payment,  he  was  frequently 
obliged  to  refuse  them.  To  make  him  pay  would  cause  em- 
barrassment to  the  business  community,  and  thus  his  creditors 
were  disposed  to  deal  very  gently  with  him.  The  result  was 


172          DESCRIPTION  OF  TUB  SOCIAL  ORGANISM.       [II.  86. 

throughout  our  whole  western  country  a  great  mass  of  depre- 
ciated paper  money,  issued  by  banks  which  those  who  handled 
the  money  really  knew  nothing  about — money  which  frequently 
proved  worthless,  thus  causing  great  loss  to  the  last  holders. 

86.  Suspension  of  Specie  Payments.  "We  have  described 
the  distress  resulting  to  a  community  in  the  case  of  a  general 
run  upon  banks,  causing  a  shrinkage  of  the  circulation  and  an 
inability  of  the  bank  to  'make  loans  to  those  requiring  them. 
To  avoid  this  evil  it  used  to  be  very  common  in  America  for 
banks  to  suspend  specie  payment  under  such  circumstances. 
Then,  when  the  depositor  came  for  his  money,  they  refused  to 
pay  him  in  cash,  but  tendered  him  only  a  circulating  note  of 
their  own  or  some  other  bank.  If  he  asked  the  payment  of  this 
note,  he  was  told  that  he  must  wait.  By  thus  dishonoring  its 
own  obligations,  the  bank  was  enabled  to  continue  making 
loans  to  its  customers.  In  order  to  do  so,  it  only  had  to  write 
the  appropriate  credits  on  the  books  of  the  bank  in  exchange 
for  the  customer's  promissory  notes.  What  it  loaned  him,  how- 
ever, was  not  money,  but  rather  the  hope  of  money.  There 
was  little  danger,  within  moderate  limits,  of  the  bank  having  to 
pay  out  large  amounts  of  these  notes,  because  no  one  had  an 
object  in  demanding  notes  which  would  serve  him  no  better 
purpose  than  the  credits  in  his  bank-book.  The  bank  in  its 
relation  to  its  depositors  was  in  the  position  of  a  debtor  who 
was  not  obliged  to  pay  out  anything  but  promises  to  pay,  and 
who  could  therefore  afford  to  accumulate  debts  while  awaiting 
the  return  of  better  times. 

To  these  defects  of  the  old  bank  currency  we  may  add  the 
evils  arising  from  counterfeiting.  Counterfeit  bank-notes  were 
so  numerous  that  the  "  Bank-note  Detector  "  was  almost  a  ne- 
cessity in  every  place  where  considerable  sums  of  money  were 
paid  and  received.  This  Detector  was  a  periodical  publication, 
giving  the  names  of  all  the  incorporated  banks  in  the  different 
States,  with  descriptions  of  the  genuine  notes  of  each  denomi- 
nation, and  of  the  counterfeits  which  had  got  into  circulation. 


II.  88.]          ORGANIZATION  OF  BANKS  IN  DETAIL.  173 

87.  National  Banking  System  of  the  United  States.     The 
evil  thus  arising  led  during  the  Civil  War  to  the  establishment 
by  Congress  of   the  national  banking  system  of  the  United 
States.     Our  account  of  this  system  will  be  confined  to  its  lead- 
ing economic  features.      Every  such  system  requires  for  its 
operation   many  legal  enactments  which  do  not  concern  the 
economist.    The  latter  is  principally  concerned  with  the  provi- 
sions which  regulate  the  credits  of  the  bank,  and  the  funds 
which  it  holds  to  make  good  such  credits.     "We  call  to  mind 
that  an  important  part  of  the  circulating  medium  does  not  con- 
sist of  coined  money,  but  of  debts  payable  on  demand  by  the 
bank,  the  right  to  receive  which  is  transferred  from  hand  to 
hand  as  if  it  were  money.     In  order  that  these  debts  may  be 
of  equal  value  with  coin,  the  bank  is  obliged  to  pay  them  on 
demand.     They  are  of  two  kinds,  bank-notes  and  bank  credits. 
The  latter  are  transferred  by  simple  delivery,  as  in  the  case 
of  money.     The  former  are  transferred  by  written  cheques  as 
already  described.     To  pay  this  indebtedness  on  demand,  the 
bank  has  two  kinds  of  resources.     The  one  consists  of  promis- 
sory notes  of  business  men,  payable  with  interest  at  future 
times,  and  of  other  forms  of  property  and  of  credit.     The 
other  resource  is  coined  money.     Since,  as  already  shown,  the 
volume  of  coined  money  is  less  than  the  amount  of  credit  pay- 
able on  demand,  and  since  the  greater  the  volume  of  the  latter 
the  higher  the  profit  of  the  bank,  it  follows  that  there  must 
be  some  restrictions  upon  the  power  of  the  bank  to  increase  its 
credit  money  and  pay  out  its  stock  of  coin.     These  restrictions 
we  shall  now  proceed  to  consider. 

88.  Private  banks  —  that  is,  men  or  firms  who  become 
bankers  simply  as  a  matter  of  private  business — are  not  ordi- 
narily subject  to  any  legal  limitations.    It  may  be  assumed  that 
no  one  does  business  with  such  a  banker  unless  he  is  satisfied 
of  his  good  financial  standing  and  of  his  business  ability  and 
prudence.     The  interest  which  the  banker  feels  in  his  own 
reputation  is  a  strong  incentive  to  caution,  and,  in  the  view  of 


174          DESCRIPTION  OF  THE  SOCIAL  ORGANISM.       [II.  89. 

some,  offers  better  security  than  any  law  directing  him  how  to 
regulate  his  business  can  offer. 

Private  bankers  may  establish  book  credits  in  favor  of  their 
customers  to  any  extent,  thus  performing  all  the  functions  of 
banks  of  deposit,  but  they  are  not  allowed  to  issue  circulating 
notes.  Now,  although  a  book  credit  transferable  by  cheque  is 
economically  of  the  same  nature  as  the  indebtedness  expressed 
by  a  bank-note,  yet  the  two  stand  on  a  very  different  footing 
in  their  relations  to  the  community.  Cheques  are  generally 
drawn  for  considerable  sums,  and  are  employed  for  payments 
only  between  well-known  and  responsible  men  of  business. 
Since  every  person  who  draws  or  indorses  a  check  thereby 
guarantees  its  validity,  any  person  receiving  it  can  not  only  re- 
quire payment  of  the  bank,  but  in  case  the  bank  does  not  pay 
he  has  the  right  to  require  payment  of  the  drawer  or  of  any 
previous  indorser.  Hence  he  has  a  greater  security  than  that 
afforded  by  the  solvency  of  any  one  individual  taken  singly. 

But  in  the  case  of  bank-notes  this  additional  security  is 
wanting.  When  they  once  get  into  circulation  they  will  be 
offered  in  the  course  of  trade  to  persons  who  know  nothing 
about  the  bank  and  have  no  means  of  assuring  themselves  that 
the  note  is  genuine.  It  therefore  seems  more  necessary  that 
the  law  shall  protect  the  individual  against  the  danger  of  being 
compelled  to  take  a  worthless  bank-note  than  that  it  shall  pro- 
tect him  against  the  danger  of  a  worthless  cheque.  In  the  one 
crvse  he  can  protect  himself,  and  in  the  other  he  cannot. 

89.  The  principle  of  protection  adopted  in  the  national 
banking  system  is  taken  from  one  previously  in  force  in  the 
State  of  New  York.  To  see  what  the  principle  is,  let  us  once 
more  recur  to  the  relation  between  the  amount  of  notes  which 
a  bank  has  in  circulation  and  the  funds  it  retains  in  its  vaults 
to  pay  those  notes  whenever  required.  The  bank  could  be  re- 
quired to  keep  in  its  vaults  a  supply  of  coin  equal  to  the  whole 
volume  of  its  notes,  and  to  use  this  coin  for  no  other  purpose 
than  the  payment  of  the  notes  as  presented.  But  it  has  already 


H.  90.]          ORGANIZATION  OF  BANKS  IN  DETAIL.  175 

been  shown  that,  were  this  policy  adopted,  the  bank  would 
have  nothing  to  compensate  it  for  the  expense  and  labor  of 
issuing  the  notes.  Its  only  source  of  compensation  is  the  inter- 
est gained  by  loaning  the  money  held  in  reserve.  The  problem 
then  is  to  allow  this  reserve  to  be  invested  in  such  a  way  as  to 
yield  interest,  and  at  the  same  time  to  be  available  for  no  other 
purpose  than  the  payment  of  the  notes  in  case  of  necessity. 

Our  national  banking  system  requires  that  before  issuing 
notes  a  bank  shall  have  deposited  with  the  Treasurer  of  the 
United  States  interest-bearing  bonds  of  the  United  States  to  an 
amount  not  less  than  $30,000  and  not  less  than  one  third  of  its 
capital  stock.  Thereupon  the  bank  is  authorized  to  issue  cir- 
culating notes  to  an  amount  not  exceeding  90  per  cent  of  the 
par  value  or  the  market  value  of  the  bonds  so  deposited.  To 
guard  against  an  excess  of  notes  above  the  legal  limit,  the  bank 
is  not  allowed  to  issue  any  except  such  as  it  receives  in  blank 
from  the  Comptroller  of  the  Currency  in  "Washington.  The 
bonds  held  by  the  Treasurer  can  be  applied  to  no  purpose  ex- 
cept the  redemption  of  the  notes  in  case  the  bank  fails  to 
redeem  them  itself.  The  bank,  however,  regularly  receives  the 
interest  on  its  bonds.  The  result  of  this  arrangement  is  that 
although  a  bank  may  fail  to  pay  a  note  on  demand,  the  holder 
of  the  note  is  secured  against  ultimate  loss.  Consequently  no 
person  in  taking  a  national -bank  note  has  any  occasion  to  con- 
cern himself  with  the  standing  of  the  bank  which  has  issued  it. 
Pr-obably  in  not  one  case  out  of  a  hundred  does  the  person  Avho 
receives  a  note  look  to  see  what  bank  issued  it.  Counterfeits 
are  of  course  possible.  But  the  public  has  to  trust  the  vigi- 
lance of  the  government  to  guard  it  against  them. 

9O.  It  is  of  course  always  necessary  that  a  well-ordered 
bank  shall  keep  on  hand  a  reserve  in  coin  or  legal-tender  money 
available  to  pay  its  notes  and  credits  as  they  are  from  time  to 
time  presented.  The  question  how  large  this  reserve  must  be 
is  one  of  the  most  difficult  in  banking.  In  the  case  of  private 
banks  it  is,  as  already  said,  left  to  the  discretion  of  the  bankers 


176          DESCRIPTION  OF  T11E  SOCIAL   ORGANISM.       [II.  90. 

themselves.  In  the  case  of  national  banks  in  any  of  the  prin- 
cipal cities  of  the  Union  the  reserve  is  required  to  be  at  least  25 
per  cent  of  the  outstanding  circulating  notes  and  deposits  of 
the  bank.  In  the  case  of  banks  situated  in  the  smaller  towns 
the  required  reserve  is  15  per  cent. 

Of  course  it  cannot  be  required  absolutely  that  the  reserve 
shall  never  fall  below  this  limit,  because  the  very  object  of  the 
reserve  is  to  pay  the  indebtedness  on  demand,  and  if  payment 
is  demanded  faster  than  money  is  received  the  reserve  may  fall 
to  zero.  The  law  therefore  simply  requires  that  when  the  re- 
serve falls  below  the  required  limit  the  bank  shall  not  increase 
its  liabilities  payable  on  demand  ;  in  other  words,  it  shall  stop 
loaning  money. 

Thus  the  law  does  the  best  it  can  to  insure  that  the  business 
of  the  national  banks  shall  be  conducted  on  sound  principles. 
But  experience  shows  that  no  legal  provisions  can  afford  secu- 
rity against  bad  management.  Examinations  are  made  from 
time  to  time  to  see  that  every  bank  has  on  hand  the  securities 
and  other  property  which  the  state  of  its  business  requires.  But 
when  a  bank  is  authorized  to  loan  money  to  individuals,  no  ex- 
amination can  make  it  certain  that  the  borrowers  are  all  solvent. 
Bad  debts  are  incurred  from  time  to  time,  and  stocks  and  bonds 
may  depreciate  or  become  worthless.  The  holders  of  circulat- 
ing notes  have  still  a  security  which  is  almost  certain,  in  the 
bonds  deposited  with  the  Treasurer  of  the  United  States,  but 
creditors  of  all  other  kinds  are  liable  to  suffer  loss.  Yet,  if  -we 
should  compare  the  loss  actually  suffered  with  the  business 
transacted,  the  amount  of  risk  would  be  found  surprisingly 
small.  The  daily  transfers  made  by  bank  notes  and  credits 
amount  in  the  city  of  New  York  alone  to  many  millions  of 
dollars.  The  total  loss  in  the  whole  country  to  depositors 
probably  never  amounted  to  a  million  of  dollars  in  any  one 
year,  except  in  cases  of  some  great  swindle.  The  danger  of 
loss  incurred  by  money  in  one's  pocket  or  drawer  is  many 
times  that  which  it  incurs  when  deposited  in  any  bank  man- 
aged with  common  honesty  and  prudence. 


II.  91.]          ORGANIZATION  OF  BANKS  IN  DETAIL.  177 

91.  TJie  BanTc,  of  England  Plan.  The  problem  of  estab- 
lishing a  proper  relation  between  the  credit  currency  issued 
by  a  bank  and  its  reserve  fund  is  met  differently  in  different 
countries.  In  this  respect  the  Bank  of  England  is  governed 
by  the  celebrated  Charter  Act  of  1844,  a  measure  due  to  Sir 
Robert  Peel.  The  business  of  the  bank  is  divided  into  two 
separate  departments,  the  one  the  "  banking  department,"  the 
other  the  "  issue  department."  The  banking  department  re- 
ceives deposits  transferable  by  cheque  in  the  way  described  in 
the  preceding  chapter,  but  it  does  not  issue  notes.  The  issue 
department  emits  bank-notes  for  circulation,  and  keeps  its  sepa- 
rate reserve  fund  to  insure  payment  of  the  notes. 

The  basis  of  the  regulations  governing  the  issue  department 
is  this :  it  was  found  that  the  volume  of  notes  in  actual  circula- 
tion generally  ranged  between  sixteen  and  twenty  millions  of 
pounds,  seldom  or  never  falling  below  the  former  limit.  It 
was  therefore  assumed  that  a  certain  minimum  volume  of  bank- 
notes would  perpetually  remain  in  circulation,  and  so  never 
be  presented  for  actual  payment  at  the  counter  of  the  bank. 
This  assumed  minimum  was  originally  fixed  at  fourteen  mil- 
lions, but  has  since  been  increased  to  fifteen  millions.  This 
amount  may  be  issued  by  the  bank  without  keeping  any  coin  for 
their  payment,  though  of  course,  as  already  shown,  an  equal 
amount  of  promissory  notes  from  individuals,  or  of  govern- 
ment securities,  must  always  be  held  by  the  bank.  But  for 
every  note  issued  above  this  minimum  an  equal  amount  in  coin 
or  bullion  must  be  held  by  the  issue  department  of  the  bank. 

The  result  of  this  arrangement  is  that  if  the  volume  of  the 
coin-reserve  diminishes,  so  as  to  be  but  little  above  the  excess 
of  notes  in  circulation  over  fifteen  millions,  no  more  notes  can 
be  issued.  Now,  for  reasons  the  statement  of  which  belongs 
to  a  more  advanced  part  of  our  subject,  this  state  of  things  is 
likely  to  occur  at  the  very  time  when  the  public  are  most  in 
need  of  notes,  credit,  or  other  forms  of  currency.  The  power 
of  the  bank  to  perform  one  of  its  functions  is  thus  paralyzed  at 
the  very  moment  when  this  function  is  most  essential  to  the 

12 


178          DESCRIPTION  OF  TUB  SOCIAL  ORGANISM.        [II.  91. 

business  interests  of  the  community.  This  difficulty  has  been 
met  by  an  expedient  known  as  a  "  suspension  of  the  Charter 
Act "  by  an  "  order  in  council "  of  the  government.* 

Three  such  suspensions  have  been  authorized,  in  the  years 
1847, 1857,  and  1866  respectively.  The  suspension  authorizes 
the  bank  directors  to  count  the  reserve  of  the  issue  depart- 
ment as  a  part  of  the  reserve  fund  of  the  banking  department, 
so  that  the  latter  could  still  discount  the  notes  of  merchants, 
although  its  reserve  fell  below  the  proper  limit. 

The  necessity  of  this  suspension  has  subjected  the  act  in  ques- 
tion to  criticism,  on  the  ground  that  a  law  which  has  to  be  sus- 
pended from  time  to  time  proves  itself  to  be  defective  by  its 
own  operation.  If  the  object  of  human  laws  is  to  establish 
regulations  which  shall  forever  govern  the  relations  of  men, 
without  any  modifications  whatever,  then  this  criticism  is  un- 
doubtedly sound.  But  taking  a  different  point  of  view,  we 
may  regard  the  arrangement  as  one  of  the  finest  examples  of 
the  practical  adaptation  of  laws  to  the  varying  circumstances 
of  mankind  that  ever  was  invented.  A  law  is  devised  which 
works  with  entire  success  except  in  rare  emergencies.  The 
provision  that  it  shall  cease  its  operations  temporarily  under 
these  emergencies  may  be  regarded  from  a  practical  point  of 
view  as  an  excellent  one,  the  law  being  enforced  so  long  as  it 
is  beneficial,  and  no  longer. 

*  The  term  " suspension"  applied  to  these  orders  is  sometimes  mis- 
construed by  people  in  this  country  not  conversant  with  financial  affairs, 
through  the  same  word  having  been  applied  here  to  the  cessation  of  specie 
payments  by  our  banks.  The  assumption  that  a  "  suspension  "  of  the  bank 
act  meant  a  suspension  of  specie  payments  by  the  bank,  though  utterly 
false,  was  frequently  urged  by  popular  orators  as  an  excuse  for  the  issue  of 
paper  money.  As  a  matter  of  fact,  the  Bank  of  England  has  not  for  a 
moment  suspended  specie  payment,  or  thought  of  doing  so,  since  its  re- 
sumption in  1819. 


IL  92.]  IRE  CLEARING-HOUSE  SYSTEM.  179 


CHAPTER  XIV. 

THE   CLEARING-HOUSE   AND   FOREIGN   EXCHANGE. 

92.  IN  the  great  financial  centres  the  banks  have  a  system 
of  balancing  their  accounts,  the  study  of  which  is  instructive  to 
the  student  of  economics,  because  it  shows  an  ideal  system  by 
which  we  might  imagine  the  accounts  of  every  individual  with 
the  community  to  be  balanced  in  the  actual  commerce  of  the 
world.  To  understand  it  let  us  commence  by  considering 
what  the  banks  are  to  do  with  the  cheques  which  they  hold 
upon  other  banks.  Let  us  suppose  that  there  are  ten  banks 
of  deposit  in  a  town.  Then,  under  the  system  explained  in 
Chapter  XIIL,  each  bank  will  have  deposited  with  it  each  day 
a  greater  or  less  number  of  cheques  drawn  upon  each  of  the 
other  nine  banks.  It  therefore  has  the  right  to  send  these 
cheques  around  to  the  banks  on  which  they  are  drawn  and 
receive  the  money  for  them.  "Were  this  process  actually  gone 
through  with,  the  amount  of  coin  to  be  transported  back  and 
forth  would  be  very  great,  almost  equal  in  fact  to  the  sum 
total  of  all  the  mercantile  transactions  of  the  town  during  the 
day.  But  it  is  evident  that  since  bank  A  holds  cheques  drawn 
on  bank  B,  and  bank  B  holds  cheques  on  bank  A,  only  the  dif- 
ference of  the  sums  total  of  these  two  classes  of  cheques  will 
have  to  be  paid  in  money.  Thus  a  certain  amount  of  trans- 
portation of  coin  may  be  saved  by  each  bank,  through  a  repre- 
sentative, meeting  each  of  the  others  in  advance  of  payment, 
exchanging  cheques,  and  having  each  debtor  bank  pay  the  bal- 
ance due  to  the  creditor  bank. 

But  a  little  consideration  will  show  that  a  still  greater  saving 
is  ideally  possible.  Let  each  bank  at  the  end  of  the  day  add 
up  the  sum  total  of  the  cheques  which  it  holds  against  all  the 
other  banks.  Let  the  sum  total  of  these  credits  be  called  C. 


180          DESCRIPTION  OF  THE  SOCIAL  ORGANISM.       [II.  92. 

Then  take  the  sum  total  of  all  the  cheques  against  it  held  by 
other  banks,  which  it  must  pay.  If  we  call  this  sum  total  of 
its  debts  D,  it  is  clear  that,  after  all  payments  are  made,  the 
amount  of  money  in  its  vault  will  be  algebraically  increased  by 
C  minus  D.  In  other  words,  it  will  have  received  C  dollars 
and  will  have  paid  out  D  dollars.  When  D  is  greater  than  C, 
its  stock  of  coin  will  be  diminished  by  the  difference  of  the 
two  quantities ;  when  less,  it  will  have  been  increased  by  this 
difference.  Hence  all  the  money  which  it  is  really  necessary 
for  the  bank  to  handle  is  this  difference.  Moreover,  since 
every  cheque  appears  as  a  credit  in  favor  of  one  bank,  and  an 
equal  debit  against  the  other  bank,  it  is  evident  that  the  sum 
total  of  the  C's  for  all  the  banks  will  be  exactly  equal  to  the 
sums  total  of  the  D's.  If,  therefore,  we  call  each  bank  whose 
C  is  greater  than  its  D  a  creditor  bank,  and  each  bank  whose 
D  is  greater  than  its  C  a  debtor  bank,  the  sum  total  of  the 
credits  held  by  the  creditor  banks  will  be  exactly  equal  to  the 
sum  total  of  the  debts  due  by  the  debtor  banks.  Hence :  If 
any  agency  collects  all  the  amounts  due  from  the  debtor  banfts, 
the  agency  can  with  the  money  thus  collected  pay  all  that  is 
due  to  the  creditor  banks. 

Such  an  agency  is  called  a  clearing-house.  All  the 
cheques  drawn  on  any  day  are  brought  to  the  clearing-house  on 
the  following  morning.  The  sum  total  of  the  cheques  held  by 
each  bank  is  added  up,  thus  showing  the  amount  C  of  each 
bank's  gross  credits.  The  grand  total  of  all  these  credits  is  the 
sum  of  all  the  cheques. 

The  cheques  are  then  re-classified  with  reference  to  the 
banks  on  which  they  are  drawn.  The  sum  total  drawn  against 
each  bank  is  its  D.  The  grand  total  is  again  formed,  which  is 
of  course  equal  to  the  grand  total  of  the  C's.  The  table  on  the 
opposite  page  shows  how  the  operation  may  be  performed. 

Under  each  bank  whose  name  is  found  at  the  top  of  a  col- 
umn is  written  the  amount  of  the  cheques  which  it  holds  against 
the  several  other  banks  whose  names  appear  on  the  side.  Thus 
the  Exchange  Bank  is  supposed  to  hold  cheques  to  the  amount 


II.  92.] 


THE  CLEARING-HOUSE  SYSTEM. 


181 


of  284  units  (which  we  may  consider  to  be  dollars,  hundreds 
or  thousands  of  dollars  as  we  please)  against  the  Planter's 
Bank  ;  276  against  the  Merchant's  Bank;  420  against  the  Gro- 
cer's Bank,  etc.  Adding  up  its  column,  we  find  the  sum  total 


Name  of  Bank. 

Plan- 
ter's. 

Mer- 
chant's 

Gro- 
cer's. 

Ex- 
change. 

State. 

City. 

North. 

Total. 

$532 

$210 

$284 

$725 

$802 

$219 

$277S 

Merchant's  

$735 

432 

276 

818 

901 

364 

3,526 

Grocer's  

150 

724 

420 

324 

293 

892 

2,803 

262 

163 

183 

790 

416 

246 

2060 

State       

819 

875 

896 

208 

184 

325 

3,307 

City 

522 

808 

404 

525 

415 

214 

2888 

North 

415 

194 

325 

179 

529 

279 

1,921 

Total   

$2,903 

$3,290 

$2,456 

$1.892 

$3.601 

$2,875 

$2,260 

$19.283 

of  all  the  cheques  which  it  holds  against  all  the  other  banks  is 
$1892.  In  the  same  way  the  Planter's  Bank  holds  cheques 
against  the  other  banks  to  the  total  amount  of  $2903,  and  so 
on.  Thus  we  have  the  sums  total  given  at  the  bottom  of  each 
column  as  the  total  credit,  C,  of  each  bank. 

Now  consider  the  horizontal  lines.  The  Planter's  Bank  has 
against  it  $532  held  by  the  Merchant's  Bank,  $216  by  the  Gro- 
cer's Bank,  etc.  The  sum  total  is  found  in  the  right-hand  col- 
umn to  be  $2778. 

Now  take  the  banks  individually  with  reference  to  their  total 
debts  and  credits.  The  Planter's  Bank  has  a  total  credit  of 
$2903,  and  the  total  debt  is  found  in  the  right-hand  column  to 
be  $2778.  Balancing  this  account,  it  is  a  net  creditor  to  the 
amount  of  $125.  Taking  the  other  banks  in  the  same  way, 
we  find  the  following  results: 

DEBTOR  BANKS.  CREDITOR  BANKS. 

Merchant's $230  Planter's $125 

Grocer's 347  State 294 

Exchange 108  North 339 

City 13 


Total $758        Total. 


.$758 


The  debts  are  now  balanced  in  the  following  way :     The 
Merchant's  Bank  pays  into  the  clearing-house  $230,  the  Gro- 


182          DESCRIPTION  OF  TUE  SOCIAL  ORGANISM.       [II.  93. 

cer's  $347,  the  Exchange  $168,  and  the  City  $13,  making  a 
total  of  $758.  The  clearing-house  pays  $125  of  this  sum  to 
the  Planters  Bank,  $294  to  the  State  Bank,  and  $339  to  the 
North  Bank,  which  at  the  same  time  exhausts  the  fund  and 
settles  all  the  accounts.  By  these  small  payments  transactions 
amounting  in  all  to  $19,283  are  settled  with  exactly  the  same 
result  to  each  bank  as  if  each  account  had  been  settled  sepa- 
rately. A  mass  of  indebtedness  which  amounts  to  a  vast  sum 
total  is  thus  balanced  by  comparatively  small  payments. 

93.  In  practice  this  clearing-house  system  can  only  be  ap- 
plied to  banking  institutions.  But  if  all  mankind  were  per- 
fectly reliable  and  honest,  it  could  be  carried  into  all  the  ac- 
counts of  society,  and  the  use  of  money  would  then  be  con- 
fined to  the  payment  of  balances  at  stated  periods.  Every 
man  who  produces  and  sells  anything,  or  who  renders  to  his 
neighbor  or  the  public  at  large  any  services  for  which  he  re- 
ceives money  in  payment,  is,  by  the  act  of  supplying  such 
commodity  or  service,  a  creditor;  and  this  credit  or  service  is 
balanced  by  the  money  he  receives.  For  whatever  he  pur- 
chases or  gains  from  others  he  is  a  debtor;  and  he  pays  his 
debt  in  money  (cf.  §  55).  We  might  then  imagine  an  account 
kept  between  each  person  and  society  at  large,  the  latter  being 
the  clearing-house.  The  value  of  every  commodity  or  service 
which  he  rendered  to  others  would  be  recorded,  this  value 
being  exactly  what  would  have  been  paid  for  it  had  it  been 
done  for  money.  On  the  other  side  of  the  account  everything 
he  gained  or  received  from  others  would  be  charged  against 
him.  Then  at  stated  intervals,  once  a  year  for  instance,  we 
might  suppose  his  accounts  balanced  by  his  paying  to  some 
central  person  the  excess  of  his  debits,  and  receiving  the  excess 
of  his  credits.  The  final  result  of  this  system  would  be  the 
same  to  which  the  actual  system  of  exchange  by  means  of 
money  leads.  But  owing  to  the  imperfections  of  human 
nature,  and  the  impossibility  of  keeping  such  an  account  in  a 
way  which  every  one  would  agree  upon  as  perfect  and  free 


II.  94]  FOREIGN  EXCHANGE.  183 

from  error,  the  balance  has  to  be  preserved  in  each  individual 
case  by  the  actual  transfer  of  money  back  and  forth. 

94.  Of  Foreign  Exchange.  If  we  consider  once  more  the 
subject  of  credit,  we  shall  see  that  to  give  a  credit  entire  pre- 
cision two  agencies  and  two  provisions  come  into  play. 

The  first  agency  is  a  debtor,  who  may  be  any  legal  person 
whatever,  but  in  the  case  that  we  are  now  considering  is  gen- 
erally a  banking  or  mercantile  firm. 

The  second  agency  is  a  creditor,  or  person  to  whom  the 
payment  is  due,  who  also  may  be  any  legal  person  whatever. 

One  provision  is  a  designated  place  of  payment. 

Another  is  a  designated  time  of  payment. 

The  necessity  of  having  a  designated  place  of  payment  will 
appear  on  reflecting  that  without  it  the  debtor  might  not  know 
where  to  find  the  creditor.  Hence  in  mercantile  credits  the 
bank  or  other  point  where  the  parties  or  their  agents  must 
meet  in  order  to  make  and  receive  payment  has  to  be  speci- 
fied. Again,  if  no  time  of  payment  were  understood,  but  if 
the  act  could  be  postponed  indefinitely  at  the  option  of  the 
creditor,  the  debt  would  be  worthless.  Hence  in  mercantile 
credits  the  time  when  payment  is  to  be  made  is  always  speci- 
fied, and  when  not  specified  the  debt  is  payable  on  demand. 
For  our  present  purpose  we  need  not  take  account  of  any  post- 
ponement of  the  time  of  payment,  but  may  consider  the  debt 
as  payable  upon  demand. 

Now  the  creditor  and  debtor  need  not  live  in  the  same 
place  nor  in  the  same  country.  The  place  of  payment  may  be 
yet  a  third  country,  though  it  is  more  commonly  the  country 
in  which  the  debtor  resides.  Hence  a  person  may  bo  the 
owner  of  the  right  to  receive  money  in  a  foreign  country. 

Credit  payable  in  a  country  foreign  to  the  creditor  is  called 
foreign  exchange,  or  simply  exchange.  Exchange  is  said  to  be 
on  the  country  or  city  where  the  payment  is  to  be  made. 
Tims,  exchange  on  London  means  the  right,  which  may  be 


184          DESCRIPTION  OF  THE  SOCIAL  ORGANISM.       [II.  94. 

possessed  by  a  person  in  any  part  of  the  world,  of  requiring 
a  money  payment  in  London. 

In  order  that  foreign  exchange  may  have  any  value  it  is 
evident  that  there  must  be  intercommunication  between  the 
residence  of  the  creditor  and  the  country  where  the  debt  is 
payable.  A  debt  payable  in  the  moon  would  have  no  value, 
even  if  by  looking  through  our  telescopes  we  could  see  the 
gold  piled  up  and  only  waiting  for  the  creditor  to  get  it.  But 
an  American  may  buy  goods  in  London,  and  he  must  then 
make  payment  in  London.  A  credit  payable  in  London  will 
be  of  greater  utility  to  him  for  this  purpose  than  one  payable 
at  home,  because  it  will  save  him  the  expense  of  transporting 
money  to  London. 

The  ownership  of  foreign  exchange  is  transferred  by  an  in- 
strument in  writing  called  a  bill  of  exchange,  of  the  same  gen- 
eral character  as  a  bank  cheque,  but  usually  more  elaborate. 
Like  a  cheque,  it  consists  of  a  formal  order  from  the  creditor, 
or  drawer,  to  the  debtor,  or  drawee,  directing  him  to  pay  a 
specified  sum  of  money  to  the  order  of  a  third  person,  called 
the  payee.  When  this  bill  is  transferred  from  the  drawer  to 
the  payee,  the  latter  becomes  the  owner  of  the  foreign  ex- 
change, with  all  the  rights  which  pertain  to  that  ownership.* 

The  payee  may  reside  in  any  part  of  the  world  without  in 
any  way  impairing  his  ownership.  But  in  order  that  the  bill 
may  become  payable  it  has  of  course  to  be  transferred  to  some 

*  Owing  to  the  danger  of  loss  and  delay  in  the  transmission  of  bills  when 
the  only  communication  between  countries  was  by  sailing-ships  or  stage- 
coaches, it  was  customary  to  deliver  bills  of  exchange  in  the  form  of  three 
separate  orders,  called  first,  second,  and  third  of  exchange.  This  custom  is 
still  continued.  The  form  of  a  bill  of  exchange  is  commonly  as  follows  : 

Sixty  days  after  sight  of  this  my  first  of  exchange  (second  and  third  of  same 
tenor  and  date  unpaid)  pay  to  the  order  of  James  Smith  five  hundred  pounds 
sterling,  value  received,  and  charge  the  same  as  advised. 

RHETT  &  Co. 
To  Messrs.  Smith  &  Co.,  London. 

In  the  three  orders  the  words  first,  second,  and  third  are  permuted,  so 
that  each  is  an  order  to  pay  provided  the  other  two  remain  unpaid. 


II.  95.]  FOREIGN  EXCHANGE. 

person  in  the  place  of  payment,  which  we  may  suppose  to  be 
London.  This  person  presents  it  to  the  payee,  who  acknowl- 
edges the  obligation  of  paying  it  by  writing  upon  it  an  accept- 
ance. 

Foreign  exchange  may  be  transferred  like  any  other  credit. 
Exchange  on  London  is  bought  and  sold  as  if  it  were  a  com- 

o  c? 

modity  in  all  parts  of  the  world.  To  see  its  origin,  suppose 
that  an  American  merchant  ships  a  cargo  of  goods  to  a  London 
correspondent  for  sale.  When  the  goods  are  sold,  the  corre- 
spondent becomes  indebted  to  the  shipper  in  the  amount  agreed 
upon.  Thus  the  shipper  in  New  York  becomes  the  creditor 
of  the  firm  in  London.  He  can  then  draw  a  bill  of  exchange 
on  his  London  correspondent,  take  it  to  a  banker,  and  sell  it 
for  whatever  sum  it  commands  from  the  banker.  The  latter 
transfers  it  to  his  London  banker  by  the  usual  indorsement, 
and  the  London  banker  collects  the  money  from  the  payee. 
Thus  the  New  York  banker  becomes  the  owner  of  the  credit 
in  a  London  bank. 

Now  suppose  that  another  American  merchant  desires  to 
purchase  goods  in  London.  In  order  to  pay  for  them  he  goes 
to  the  banker  and  asks  him  for  a  bill  of  exchange  on  London. 
A  bill  for  the  required  amount  is  sold  to  him  at  any  price  that 
may  be  agreed  upon,  and  is  by  him  transferred  to  his  London 
correspondent.  The  correspondent  takes  it  to  the  London 
banker  and  receives  payment. 

95.  The  advantage  of  this  system  is  that  much  of  the 
trouble  and  expense  of  transporting  money  backward  and  for- 
ward is  saved.  If  every  merchant  in  New  York  who  bought 
goods  in  London  had  to  send  money  over  to  pay  for  them,  and 
every  one  who  sold  goods  there  had  to  bring  his  money  home, 
the  expense  of  transporting  the  money  back  and  forth  would 
be  considerable.  With  bills  of  exchange  it  is  only  necessary 
to  transport  the  excess  of  the  sum  total  of  debits  over  the 
sum  total  of  credits.  So  long  as  the  payments  to  men  in  Lon- 
don balance  the  payment  due  from  them,  there  will  be  a  con- 


186       DESCRIPTION  OF  TUB  SOCIAL  oiiGAmsx.     [ii.  95. 

tinual  supply  of  bills  of  exchange  in  the  hands  of  New  York 
bankers,  and  an  equal  sale  of  them  to  merchants.  But  it  some- 
times happens  that  the  goods  purchased  abroad  exceed  those 
sold  there.  New  York  bankers  then  find  that  the  quantity  of 
bills  of  exchange  which  they  sell  exceed  those  which  they  buy. 
Consequently  their  credits  in  the  hands  of  London  bankers 
diminish  and  will  soon  be  exhausted.  To  make  them  good 
they  have  to  ship  gold  from  New  York  to  London  to  an 
amount  sufficient  to  balance  the  account.  But  if  the  value  of 
the  American  goods  sold  in  London  exceeds  the  value  of  those 
bought,  the  opposite  effect  will  take  place.  New  York  bankers 
will  find  the  amount  of  foreign  exchange  sold  them  to  exceed 
that  purchased  from  them,  and  their  idle  credits  in  the  London 
banks  will  increase.  Gold  must  therefore  be  transported  from 
London  to  New  York  to  pay  the  balance  due  the  latter  city. 

Of  course  the  converse  of  what  we  have  said  holds  true  of 
New  York  in  its  relations  to  London.  The  merchants  of  the 
latter  city  buy  and  sell  goods  in  New  York,  and  may  then 
have  to  make  payment  in  New  York.  Thus  exchange  on 
New  York  is  bought  and  sold  in  London. 


IL96.]  THE  VOLUME  OF  THE  CURRENCY.  187 


CHAPTER  XV. 

CONCLUSIONS   RESPECTING   THE   VOLUME   OF  THE   CURRENCY. 

96.  A  QUESTION  of  fundamental  importance  which  now 
arises  is,  What  should  we  regard  as  the  sum  total  of  the  cur- 
rency of  the  country?  We  must  begin  by  discussing  a  dis- 
puted question  respecting  the  definition  of  the  word  "  money  " 
which  arises  from  the  want  of  an  exact  nomenclature.  If  we 
so  far  accept  mercantile  usage  as  to  call  by  the  general  name  of 
currency  everything  which  men  pass  from  one  to  the  other  in 
payment,  we  see  that  it  comprises  the  following  classes  of 
things : 

I.  Coined  gold  or  silver.     We  have  seen  that,  on  the  mone- 
tary system  which  has  always  prevailed,  coined  gold  or  silver 
must  be  the  ultimate  basis  of  everything  that  is  used  as  money. 
Whatever  form  credit-money  may  take,  it  must,  to  be  valid, 
consist  in  a  right  to  receive  or  claim  from  some  party  a  definite 
quantity  of  coin.     A  right  to  receive  merely  ideal  money,  or 
a  representative  of  coin,  amounts  commercially  to  little  more 
than  the  right  of  a  hungry  man  to  an  ideal  loaf  of  bread.  This 
right  may,  however,  as  already  shown,  be  more  or  less  remote 
in  time  or  place  without  destroying  its  value. 

II.  Legal-tender  notes.     In  the  United  States  gold  and  sil- 
ver are  to  a  certain  extent  replaced  by  promissory  notes  issued 
by  the  government,  familiarly  known  as  "  greenbacks."     At 
present  these  notes  give  the  bearer  the  right  to  claim  from  the 
United  States  the  amount  of  gold  or  silver  coin  named  on  their 
face.     They  have  therefore  the  qualities  of  bank-notes,  but 
differ  from  them  in  being  a  legal  tender.     This  is  the  same 
thing  as  saying  that  every  person  paying  them  out  may  throw 
upon  his  creditor  the  expense  and  onus  of  having  them  paid. 
From  1862,  the  time  when  these  notes  were  first  issued,  to 


188          DESCRIPTION  OF  TUB  SOCIAL  ORGANISM.        [II.  96. 

1879,  they  were  not  payable  in  coin.  In  consequence  their 
value  was  sometimes  greatly  below  their  nominal  equivalent  in 
coin.  Since  the  resumption  of  specie  payment  by  the  govern- 
ment in  1879  they  have  been  at  par  with  coin. 

III.  Bank-notes.     The  third  kind  of  currency  consists  of 
bank-notes.     These  notes  are  now  issued  by  all  the  national 
banks  of  the  United  States  under  certain  limitations  and  re- 
strictions prescribed  by  law.     They  differ  from  greenbacks  in 
that  they  are  not  a  legal  tender  between  individuals.     The 
only  parties  responsible  for  their  payment  are  the  banks  which 
issue  them,  though  the  government  has  taken  very  efficient 
measures  to  secure  their  payment. 

IV.  Sank  credits :  that  is,  the  rijjht  to  receive  money  from 

7  *  O  */ 

a  bank,  expressed  by  figures  being  written  to  the  credit  of  the 
individual  depositor  in  the  books  of  the  bank. 

Now,  it  is  a  disputed  question  whether  anything  but  coin 
should  be  called  money.  This  is  a  question  of  definition  which 
does  not  admit  of  being  absolutely  settled,  because  anything 
may  be  called  by  any  name  which  all  agree  upon.  It  is,  how- 
ever, certain  that  the  coined  money  which  is  the  necessary 
basis  of  all  currency  should  have  a  distinctive  name.  But 
instead  of  laying  down  a  rule  on  this  subject  which  might  not 
be  accepted  by  others,  we  shall  simply  try  so  to  use  words  that 
in  each  case  it  shall  be  clear  what  is  meant.  We  shall  speak 
of  "coin"  or  "coined  money"  whenever  reference  is  made  to 
this  kind  of  money  alone. 

Currency  is  something  quite  different,  and  may  include  all 
credits  and  money  actually  used  in  payments.  At  the  same 
time,  its  actual  meaning  in  commerce  is  very  vague.  Com- 
monly it  means  only  material  money,  coin  and  notes  in  actual 
circulation.  Sometimes  it  means  paper  money,  in  contradis- 
tinction to  coin.  We  shall  use  it  in  a  sense  wider  than  either 
of  these  to  designate  everything,  material  or  immaterial,  which 
passes  from  hand  to  hand  as  money. 

The  question  now  is,  How  shall  we  determine  the  total 
volume  of  the  currency  in  dollars?  We  have  shown  that  the 


11.97.]  THE  VOLUME  OF  THE  CURRENCY.  189 

volume  of  coined  money  in  circulation  is  a  definite  quantity. 
We  now  want  to  know  what  this  quantity  becomes  in  the 
case  of  credits.  First  consider  what  the  phrase  "  volume  of 
the  currency  "  means.  The  amount  of  currency  possessed  by 
any  one  man  at  any  moment  comprises  the  disposable  funds 
which  he  has  received  in  payment  for  services  rendered,  and 
which  he  can  immediately  pay  out  at  his  pleasure.  It  is 
that  which  he  thinks  of  as  "  cash  on  hand  "  or  "  cash  on  hand 
and  in  bank."  He  may  have  it  in  three  places — in  his  pocket^ 
in  his  safe,  or  in  his  bank.  In  his  pocket  or  his  safe  it  is 
simply  so  many  dollars  in  coin  and  bank-notes.  In  bank  it  is 
simply  so  much  credit;  he  does  indeed  think  of  it  as  so  much 
money  in  bank,  but,  as  just  shown,  this  is  not  so :  it  is  not 
money,  but  credit.  IBut  this  fact  does  not  prevent  its  being 
counted  by  him  and  by  every  one  else  as  so  many  dollars,  nor 
abridge  its  power  of  performing  all  the  functions  of  money. 

In  the  case  of  merchants  who  do  business  abroad  on  a  large 
scale  we  may  add  that  yet  another  form  of  currency  is  that 
of  money  or  credit  in  the  hands  of  correspondents.  When  a 
shipper  sends  a  cargo  of  goods  abroad  and  sells  them,  he  may 
have  the  right  to  draw  upon  the  consignee  for  payment.  In 
this  case  he  conceives  himself  to  have  so  much  money  or  credit 
in  the  hands  of  the  consignee ;  but  since  he  cannot  pay  this 
credit  out  to  others  with  the  same  freedom  that  he  can  transfer 
a  bank  credit  or  a  bank-note,  it  is  not  considered  as  a  part  of 
the  currency. 

97.  We  have  now  to  consider  whether  the  sum  total  of  the 
coin  and  bank-notes  actually  existing  in  the  country  should  be 
considered  as  in  circulation.  The  principles  on  which  this 
question  is  to  be  settled  belong  to  a  more  advanced  stage  of  our 
subject,  but  the  result  can  be  stated  here.  Currency  is  to  be 
considered  in  circulation  only  when  it  can  be  paid  out  by  the 
owner  at  his  own  pleasure,  and  when  lie  is  keeping  it  for  the 
purpose  of  payment.  If  lie  is  gaining  interest  on  it,  and  is 
keeping  it  with  that  object  alone,  it  is  not  in  circulation.  What 


190          DESCRIPTION  OF  TUB  SOCIAL  ORGANISM.       [II.  98. 

we  assume  as  a  condition  of  being  in  circulation  is  that,  since 
the  owner  is  gaining  no  interest,  he  will  invest  or  expend  it  as 
soon  as  lie  can  find  an  opportunity.  This  is  the  case  with  the 
great  volume  of  money  which  every  one  has  on  hand  or  in 
bank. 

One  circumstance  now  comes  in  to  make  the  question  at  this 
point  a  little  indefinite.  Banks  and  bankers,  especially  in 
Europe,  often  pay  a  small  interest  on  their  deposits,  which  our 
national  banks  are  not  allowed  to  do.  When  the  depositor  is 
receiving  interest,  this  may  induce  him  to  leave  his  money  in 
the  bank  instead  of  paying  it  out.  But  as  the  interest  received 
is  below  the  current  rate  at  which  money  can  be  borrowed,  we 
may  consider  this  inducement  as  not  sufficient  to  keep  a  large 
sum  of  money  permanently  out  of  circulation. 

"We  may  now  see  that  the  coin  held  by  a  bank  in  reserve  to 
make  good  its  outstanding  credits  is  not  in  circulation.  It  does 

O  O 

indeed  add  to  the  circulation  three  or  four  times  its  volume  by 
enabling  the  bank  to  give  credit,  but  this  credit  we  have  already 
counted.  Now,  since  the  bank  cannot  and  does  not  pay  the 
coin  reserve  out  at  its  own  pleasure,  this  reserve  does  not  belong 
to  the  class  described. 

Nearly  the  same  considerations  apply  to  the  funds  accumu- 
lated in  the  public  treasury.  A  volume  amounting  to  several 
hundred  millions  of  dollars  is  commonly  kept  in  reserve  in  the 
vaults  of  the  treasury.  It  can  be  paid  out  only  in  pursuance  of 
law,  and  until  so  paid  is  not  in  circulation. 

The  same  rule  might  apply  to  the  treasuries  of  the  several 
States  of  our  Union.  The  amounts  held  by  them  are  not,  how- 
ever, so  great  as  to  specially  require  their  consideration. 

98.  "We  therefore  conclude  that  the  total  volume  of  the  cur- 
rency may  be  obtained  in  this  way :  Add  up  all  the  coin  in 
the  hands  of  persons,  all  the  legal-tender  and  bank  notes  in 
circulation,  and  all  the  bank  deposits.  The  sum  is  the  total 
volume  of  the  currency.  "We  do  not  include  the  coin  held  by 
the  banks  or  the  treasury  as  a  reserve,  because  this  is  not  in 


11.99.]  THE  VOLUME  OF  THIS  CURRENCY.  191 

circulation.  If  we  know  the  total  amount  of  coin  in  the 
country,  we  may  find  the  amount  in  the  hands  of  individuals 
by  subtracting  the  bank  and  treasury  reserves  from  the  sum 
total.  We  may  therefore  find  the  volume  by  adding  up  the 
total  amount  of  coin,  bank-notes,  and  deposits,  and  subtracting 
the  reserves  held  by  the  banks. 

Including  bank  credits  as  a  part  of  the  volume  of  the  cur- 
rency is  a  precaution  which  is,  unfortunately,  seldom  taken. 
Financiers  generally  include  only  coin  and  bank-notes  in  their 
official  publications.  But  bankers  know  very  well  that  the  to- 
tal volume  of  the  deposits  is  the  most  important  factor  of  all, 
and  the  correctness  of  the  student's  ideas  on  the  subject  may 
be  gauged  by  the  clearness  with  which  he  sees  that  bank  credits 
should  be  included  as  well  as  bank-notes. 

An  illustration  of  this  is  afforded  by  a  well-known  feature  of 
business  in  France.  Statistics  show  that  the  amount  of  coin 
and  bank-notes  circulating  in  that  country  is  larger  in  propor- 
tion to  its  population  than  in  most  others.  The  explanation 
of  this  is  that  the  habit  of  keeping  bank  accounts  and  making 
transfers  by  cheque  is  less  practised  in  France  than  elsewhere. 
Where  an  American  business  man  would  keep  all  his  money  in 
bank,  and  draw  cheques  for  all  payments,  the  Frenchman  keeps 
bank-notes  in  his  safe  and  pays  them  out  to  his  customers. 

At  the  same  time  it  should  not  be  lost  sight  of  that  bank 
credits  and  bank-notes  perform  for  the  most  part  quite  dis- 
tinct functions.  The  former  are  used  principally  in  large 
transactions  and  in  the  great  wholesale  operations  of  com- 
merce. The  latter  are  used  in  retail  trade. 

99.  The  question  has  sometimes  been  raised  whether  bank 
cheques  should  not  be  considered  as  a  part  of  the  volume  of  the 
currency,  since  they  pass  from  hand  to  hand  in  payment.  The 
answer  to  this  is  that  if  we  include  them  we  must  leave  out 
the  bank  deposits  which  they  represent.  We  must  be  careful 
always  to  count  every  credit  once,  but  never  to  count  it  twice. 
Let  us  look  at  the  matter  more  closely.  John  Smith  has  a 


192          DESCRIPTION  OF  TUB  SOCIAL  ORGANISM,       [II.  99. 

credit  of  $1000  on  the  books  of  the  bank.  He  hands  his 
neighbor  a  cheque  for  $500  of  this  amount.  This  does  not  in 
the  slightest  degree  increase  the  bank  credit ;  it  merely  divides 
the  ownership  of  it:  one  half  now  belongs  to  Smith,  and  one 
half  to  the  drawee  of  the  cheque.  When  the  latter  transfers 
the  cheque  to  a  third  party,  this  third  party  is  the  owner  of  the 
half  of  the  credit,  and  so  on  indefinitely  until  the  cheque  is 
paid. 

But  suppose  an  owner  to  deposit  the  cheque  in  some  other 
bank.  Then  there  is  an  apparent  increase  of  $500  in  the  total 
credit,  because  the  $1000  appears  undiminished  on  the  books  of 
the  original  bank.  So  far  as  this  original  bank  is  informed, 
John  Smith  is  still  the  owner  of  the  whole  $1000,  while  the 
other  bank  has  $500  to  the  credit  of  an  entirely  different  party, 
thus  making  a  sum  total  of  $1500.  In  reality,  however,  there 
is  still  no  greater  sum  total  of  credit.  Smith  knows  that  he 
has  only  $500  and,  being  an  honest  man  (else  the  bank  would 
have  nothing  to  do  with  him),  acts  accordingly.  The  remain- 
ing $500  is  to  the  credit  of  another  party  in  another  bank. 
When  the  cheques  are  exchanged  in  the  clearing-house  the 
state  of  the  case  will  be  patent,  and  Smith's  credit  will  be  re- 
duced to  $500.  Since  the  sum  total  of  credit  remains  un- 
changed by  the  drawing  and  transfer  of  the  cheque,  it  would 
be  a  mistake  to  consider  the  cheque  as  an  addition  to  the  cur- 
rency. It  is  neither  credit  nor  currency  in  itself,  being  only 
the  instrument  for  transferring  a  portion  of  existing  credit  un- 
changed to  another  party. 


EXERCISES.  193 


EXERCISES. 

1.  The  bank  described  in  §  81  engages  successively  in  the  following  busi- 
ness transactions.  Write  the  statement  of  its  resources  and  liabilities  at 
the  close  of  each  transaction. 

A.  It  cashes  a  cheque  for  $3000  on  another  bank,  paying  coin  for  it. 

B.  It  then  cashes  a  cheque  upon  itself  for  $4000  in  coin. 

C.  A  customer  then  deposits  a  cheque  for  $2000  on  another  bank,  and 
is  credited  "with  it. 

D.  Another  customer  then  deposits  $1000  in  coin. 

E.  Its  own  notes  to  the  amount  of  $2000  are  then  presented  for  redemp- 
tion. 

F.  A  mercantile  firm  then  borrows  $7000,  and  leaves  it  on  deposit. 

G.  Another  firm  then  borrows  $5000,  and  takes  it  in  the  bank's  own 
circulating  notes. 

H.  A  debtor  to  the  amount  of  $2000  then  pays  his  note  in  coin. 

In  making  these  various  entries,  note  that  each  separate  transaction 
changes  two,  and  only  two,  of  the  five  items:  Cash  in  vaults;  Promissory 
notes  on  hand;  Cheques  on  other  banks;  Deposits;  Circulation.  At  the 
end  of  the  last  transaction  the  statement  should  be  found  as  follows: 

RESOURCES.  LIABILITIES. 

Cash  in  vaults $34,000  Capital  stock $15,000 

Promissory  notes  (discounts)  140,000  Due  depositors 151,000 

Cheques  on  other  banks. ..  5,000  Circulation 13,000 


$179,000  $179,000 

2.  Show  that  the  preceding  transactions  will  have  added  $15,000  to  the 
volume  of  the  currency.  . 

8.  If,  after  the  last  transaction,  the  bank  should  go  into  liquidation  and 
wind  up  ils  business,  show  that  the  volume  of  the  currency  would  thus  be 
contracted  by  $130,000. 

4.  Can  you  give  any  reasons  for  the  following  provisions  of  law  regulat- 
ing the  business  of  the  national  banks? 

That  a  national  bank  shall  not  hold  real  estate  unless  rendered  necessary 
for  the  protection  of  its  interests; 

That  it  shall  not  make  any  loan  or  discount  on  the  security  of  the  shares 
of  its  own  capital  stock,  nor  purchase  its  own  stock; 

That  it  shall  not  pledge  or  hypothecate  any  of  its  notes  or  circulation  for 
the  purpose  of  procuring  money  to  be  paid  in  on  its  capital  stock  or  to  be 
used  in  its  banking  operations. 

5.  Why  do  banks  and  bankers  loan  money  only  for  short  periods! 

13 


194          DESCRIPTION  OF  THE  SOCIAL  ORGANISM. 

6.  National  bixuks  were  taxed  a  small  percentage  annually  upon  the  aver- 
ago  amount  of  their  deposits  as  determined  each  day.    The  Treasurer  of 
the  United  States  discovered  that  it  made  a  great  difference  in  the  amount 
of  the  taxes  whether  the  deposits  were  determined  each  day  at  the  close  of 
business,  or  whether  the  banks  waited  until  the  accounts  were  settled  in 
the  clearing-house  the  next  morning  before  determining  their  deposits. 
Explain  the  source  of  the  difference,  and  state  which  estimate  was  the  just 
basis  for  the  tax. 

7.  It  was  once  found  that  certain  speculators  in  New  York  would  go 
to  a  bank  and  borrow  a  large  part  of  the  legal-tender  notes  it  had  on  hand, 
and,  having  effected  the  loan,  leave  the  borrowed  notes  with  the  bank  as  col- 
lateral security  for  the  payment  of  the  loan.     What  effect  had  this  proceed- 
ing upon  the  power  of  the  bank  to  make  loans  to  their  customers,  and  at 
what  expense  to  the  speculators? 

8.  If  one  should  object  that  it  is  not  consistent  to  include  bank-notes  in 
the  volume  of  the  currency,  and  exclude  bank  cheques,  taking  the  ground 
that  both  perform  the  same  functions,  how  would  you  explain  the  diffi- 
culty? 

9.  F.  A.  Walker  discusses  at  considerable  length  the  question  what  should 
be  considered  money,  and  reaches  the  conclusion  that  coin  and  bank-notes 
are  money,  and  that  bank  cheques  are  not  money.     He  says  nothing  about 
bank  credits  in  this  connection.     Show  that  there  is  no  necessary  connec- 
tion between  a  definition  of  money  from  his  point  of  view  and  the  question 
of  volume  of  the  currency  discussed  in  Chapter  XVI.,  because  this  volume 
does  not  involve  his  definition  of  money.     (See  his  Money,  Trade,  and  In- 
dusti*y,  Chapter  I.;  Capital  and  Money,  Chapter  XVIII.) 

10.  If  bank-notes  or  other  forms  of  paper  credit  were  used  for  all  pay- 
ments from  ten  cents  upward,  in  accordance  with  the  principles  of  banking, 
in  what  respect  would  the  requirements  of  the  medium  of  exchange  pointed 
out  in  g  63  be  altered,  it  being  assumed  that  the  medium  there  described  is 
the  money  lying  in  the  bank  to  secure  the  payment  of  the  notes?  Are  there 
any  of  the  requirements  which  would  then  become  unimportant? 

11.  Consider  the  influence  of  the  wear  and  tear  of  bank-notes  upon  the 
profit  gained  by  their  circulation.     Does  it  favor  the  issue  of  large  or  small 
notes? 

12.  "In  a  period  of  depression  there  is  just  as  much  currency  in  the 
country  as  ever,  but  large  sums  lie  in  banks,  and  the  rate  of  discount  on  call 
loans  is  exceedingly  low."    What  kinds  of  currency  are  here  spoken  of? 
How  does  such  a  state  of  things  affect  the  volume  of  credit-currency? 

13.  "All  the  notes  which  represent  the  gold  actually  possessed  by  a  bank 
are  no  addition  to  the  capital  of  a  country;  but  all  the  notes  in  circulation 
in  excess  of  that,  and  which  produce  industry  or  which  people  in  general 


EXERCISES.  195 

are  willing  to  receive  in  return  for  their  commodities  or  services,  are  a 
genuine  addition  to  the  capital  of  a  nation."  Criticise  this  use  of  the  word 
capital. 

14.  Is  there  most  temptation  to  "wild-cat"  banking  where  the  rate  of 
interest  is  high  or  where  it  is  low  ? 

15.  If  the  current  rate  of  interest  should  fall  to  one  per  cent  per  annum, 
what  would  be  the  effect  upon  the  business  of  banking?    "Would  it  tend  to 
increase  or  diminish  the  volume  of  credit-money? 

16.  Are  people  most  likely  to  melt  down  subsidiary  coins,  or  coins  of 
unlimited  tender,  when  they  want  to  use  them  as  metal? 

17.  Show  how,  by  suspending  specie  payments,  the  power  of  a  bank  to 
loan  money  was  increased. 

18.  "When  our  imports  from  England  exceed  our  exports,  will  the  bankers 
of  New  York  find  the  amount  of  foreign  exchange  offered  them  or  that 
demanded  from  them  in  excess? 

19.  "Of  the  money  daily  used  a  very  small  percentage  is  bank-notes. 
The  great  bulk  is  cheques,  drafts,  and  telegrams.     The  telegraph  transmits 
millions  upon  millions  of  bank  credits  from  Boston  to  New  York,  Chicago, 
London,  etc.,  etc.,  and  the  reverse,  where  the  telegram  is  the  only  money 
used."  Criticise.   If  instead  of  telegraphing  a  man  should  telephone,  would 
his  words  be  money? — Professor  Sumner. 

20.  A  banker  "  may  be  only  just  able  to  pay  what  he  owes  to  others  and 
yet  be,  so  long  as  his  credit  lasts,  a  wealthy  man.     Suppose  that  he  owes 
$1,000,000  (without  interest)  [deposits,  etc.],  and  has  debts  of  merchants, 
railway  companies,  and  the  government  which  together  could  be  sold  for 
$1,000,000.     If  there  were  a  run  on  the  bank  and  he  had  to  suspend  pay- 
ment, his  wealth  would  be  found  equivalent  to  zero;  but  meanwhile  he  ob- 
tains the  interest  on  $1,000,000,  which  will  leave  him  a  handsome  surplus 
after  paying  the  expenses  of  the  bank.     And  since  there  is  no  reason  why 
he  shall  not  continue  to  enjoy  this  surplus  for  an  indefinite  period,  his 
business  might  obviously  be  sold  for  a  considerable  price,  even  though  its 
assets  did  not  balance  its  liabilities,  provided  that  the  sale  were  a  secret 
one,  so  that  its  credit  could  be  maintained."    Could  a  banker  do  business 
on  such  a  basis?    "Would  he  add  to  the  wealth  of  the  country? 


BOOK  III. 

THE  I^WS  OF  SUFiPLY  AJSTD 
DEMA.ND. 


BOOK  11L—TEE  LAWS   OF  SUPPLY  AND 
DEMAND. 


CHAPTER  I. 

THE   CONCEPTION   OF   VALUE. 

1.  VALUE  has  already  been  defined,  and  the  method  of 
measuring  it  described.  We  have  now  to  consider  value  as 
expressing  a  certain  relation  between  men  and  their  wants  as 
the  one  term,  and  wealth  and  its  capacity  for  gratifying  those 
wants  as  the  other  term. 

The  Conception  of  Value.  The  conception  of  value  as  a 
quality  admitting  of  measurement  offers  peculiar  difficulties 
to  the  student,  owing  to  its  intangible  character.  -No  one  has 
any  difficulty  in  conceiving  of  length,  area,  weight,  tempera- 
ture, and  other  physical  qualities,  because  these  qualities  may 
all  be  made  evident  to  the  senses.  But  in  the  case  of  value 
we  have  nothing  that  is  evident  to  the  senses.  One  may  be 
given  a  barrel  of  flour,  and  furnished  with  the  most  perfect 
means  of  measuring  all  its  physical  properties,  without  being 
able  to  form  any  estimate  of  its  value.  The  latter  will  in  fact 
depend  on  where  the  flour  is,  and  how  much  people  have  to 
eat  either  where  it  is  now  or  where  it  is  to  be  taken  to. ' 

It  follows  that  value  is  not  a  quality  inherent  in  the  com-, 
modity,  but  depends  upon  the  relation  of  the  latter  to  the 
persons  desiring  it.  Things  have  no  value  unless  they  are  in 
such  a  position  that  those  who  desire  them  can  command  them. 
If  a  barrel  of  flour  were  buried  a  hundred  feet  under  the  earth, 
it  would,  under  present  conditions,  have  no  value,  though  not 
a  single  one  of  its  physical  properties  might  have  suffered. 

Many  definitions  of  value  have   been  given  ;   it  is  called 


200  THE  LAWS  OF  SUPPLY  AND  DEMAND.          [III.  2. 

"Cost  of  production,"  "Cost  of  reproduction,"  "Estimate  of 
resistance  to  be  overcome  in  order  to  command  the  commod- 
ity," etc.  These  and  many  other  definitions  are  useful  in 
suggesting  a  simple  idea  which  hardly  admits  of  an  entirely 
satisfactory  formal  definition.  We  may  regard  value  either 
as  intensity  of  desire  or  as  utility.  When  a  man  pays  $5 
for  a  barrel  of  flour,  \ve  may  assume  that  his  desire  for 
that  barrel  of  flour  is  a  little  greater  than  his  desire  for  $5, 
and  that  the  desire  of  the  grocer  is  a  little  less.  Taking  an 
average,  the  general  desire  is  equal  to  that  for  the  money.  If 
the  value  of  a  commodity  A  is  $2,  that  of  B  $7,  and  that  of  C 
$100,  we  may  imagine  that  people  in  general  desire  these 
three  commodities  with  intensities  proportional  to  2:7:100. 

We  may  also  say  that  the  value  of  a  commodity  in  the  mar- 
ket is  its  utility  to  those  who  purchase  it.  This  definition 
agrees  with  the  other,  because  utility,  in  economics,  means 
capacity  for  satisfying  desire ;  and,  when  we  suitably  restrict 
the  meaning  of  our  terms,  we  may  say  with  logical  correctness 
that  intensity  of  desire  on  the  part  of  the  person,  and  capacity 
of  satisfying  that  desire  on  the  side  of  the  commodity,  are 
equal.  But  the  word  utility  has  another  application  which  we 
must  distinguish  from  the  present  one. 

2.  The  Economic  Conceptions  of  Utility  and  Value.  Econ- 
omists have  claimed  that,  although  utility  is  necessary  to  value, 
it  alone  does  not  suffice  to  give  value ;  for  example,  that  the 
utility  of  iron  far  exceeds  that  of  gold,  although  gold  has  a 
higher  market  value.  Again,  air  is  far  more  useful  than  either, 
since  we  should  die  without  it ;  yet  it  has  no  value  whatever.  The 
rule  was  therefore  laid  down  that  value  depended  not  only  on 
utility,  but  on  difficulty  of  acquirement ;  that  which  could  be 
acquired  without  labor  having  no  value,  how  great  soever  its 
utility.  Thus  arose  the  conception  of  two  kinds  of  value — 
value  in  use,  or  utility,  and  value  in  exchange,  or  market  value. 

The  two  Categories  of  Things  in  which  Utility  inJieres.  We 
shall  now  show  that  "  value  in  use"  and  "value  in  exchange" 


III.  2.]  THE  CONCEPTION  OF  VALUE.  201 

are  not  in  reality  two  distinct  kinds  of  value,  but  rather  the 
same  kind  of  value  inherent  in  two  distinct  categories  of  things. 
The  one  category  is  that  of  things  in  general,  as  gold  in  general, 
iron  in  general,  and  air  in  general.  The  other  category  is  that 
of  particular  things — -the  cargo  of  iron  which  has  just  arrived 
in  port ;  a  particular  ingot  of  gold ;  the  air  which  one  is  at 
the  moment  breathing. 

Utility  in  the  two  Categories.  "When  we  say  that  iron  is 
more  useful  than  gold,  we  do  not  mean  that  a  single  bar  of 
iron  really  possesses  higher  utility  than  a  similar  bar  of  gold 
would.  "What  we  mean  is  that  iron  in  general,  or  all  the  iron 
in  the  world,  is  more  useful  than  gold  in  general,  or  all  the 
gold  in  the  world.  But  a  single  bar  of  iron  is,  under  the  actual 
conditions  in  which  men  are  placed,  less  useful  than  a  bar  of 
gold,  for  the  simple  reason  that  if  the  bar  of  iron  were  lost  or 
annihilated  there  are  plenty  of  other  bars  to  take  its  place ; 
whereas  there  are  not  plenty  of  bars  of  gold. 

It  might  be  said,  in  reply  to  this,  that  the  fact  of  there  being 
plenty  of  other  bars  of  iron  does  not  really  lessen  the  value  or 
importance  of  the  service  rendered  by  any  particular  bar,  and 
that  it  is  this  service  considered  in  itself  which  determines  the 
utility  of  the  bar.  But  a  little  consideration  will  show  that  we 
cannot  make  this  kind  of  utility,  that  is,  the  utility  of  things  or 
services  in  themselves,  the  subject  of  any  precise  thought  or 
estimate.  If  we  tried  to  do  so,  we  should  conclude  that  the 
utility  of  everything  which  supports  life  is  infinite.  For  ex- 
ample, in  travelling  by  rail,  we  might  say  that  the  utility  of 
every  separate  rail  over  which  we  pass  is  infinite,  because  it 
keeps  the  train  in  which  we  ride  from  destruction.  It  is  clear 
that  such  a  conception  of  utility  cannot  be  exactly  measured. 

The  more  reasonable  definition  is  this :  The  utility  of  an  ob- 
ject is  measured  by  the  disadvantage  which  we  should  have  suf- 
fered if  tJie  object  had  never  existed.  Adopting  this  definition, 
the  utility  depends  not  merely  on  what  the  object  does  for  us, 
but  on  what  would  have  happened  if  the  object  had  not  existed. 
Now,  if  the  bar  of  iron  were  non-existent,  we  should  merely 


202  THE  LAWS  OF  SUPPLY  AND  DEMAND.          [III.  8. 

have  been  put  to  the  labor  and  expense  of  making  another  bar 
to  take  its  place.  So  it  is  this  labor  and  expense  which  measure 
its  utility,  as  well  as  its  market  value.  And  every  one  knows 
that  this  labor  and  expense  would  be  far  greater  in  the  case 
of  a  bar  of  gold  than  in  that  of  a  bar  of  iron. 

Value  in  the  two  Categoi^ies.  On  the  other  hand,  if  we 
attempt  to  assign  a  market  value  to  air,  or  iron  in  general, 
we  shall  find  it  to  correspond  to  the  utility.  If  the  inhabitants 
of  the  planet  Mars  should  offer  to  purchase  our  atmosphere, 
they  would  find  that  the  market  value  we  set  upon  it  would  be 
infinite,  because  to  part  with  it  would  be  instant  death  to  the 
inhabitants  of  this  planet ;  hence  the  "  value  in  exchange"  of 
air  in  general  is  not  zero,  but  is  rather  infinitely  great.  Again, 
if  the  inhabitants  of  Mars  should  offer  to  purchase  all  the  iron 
on  our  planet  with  an  equal  weight  of  gold,  we  should  not  ac- 
cept the  offer.  That  is,  iron  as  a  sum  total  has  a  higher  market 
value  as  well  as  a  greater  utility  than  gold  as  a  sum  total. 
There  is  therefore  no  objection  to  defining  the  value  of  com- 
modities as  equivalent  to  their  utility,  provided  that  we  always 
attach  the  correct  idea  to  the  word  utility.  .But  utility  will 
then  be  identical  with  value. 

3.  This  principle  is  closely  related  to  an  improved  theory  of 
value  formulated  by  Professor  Jevons.  Consider  a  man  in  a 
situation  where  the  command  of  food  is  difficult  or  uncertain. 
A  daily  supply  of  a  pound  of  bread  will  be  of  the  greatest 
value  to  him  ;  to  secure  it  he  would  give  all  his  time  if  neces- 
sary. It  would  be  of  equal  utility,  because  it  would  keep  him 
from  starving.  The  addition  of  a  second  pound  per  day  would 
be  of  less  utility,  and  would  also  have  less  value.  If  he  were 
offered. a  third  pound  per  day,  the  value  and  the  utility  would 
both  be  still  smaller.  If  the  loaves  offered  went  on  increasing, 
a  point  would  soon  be  reached  when  he  would  prefer  some- 
thing else  than  food,  say  clothing.  The  utilities  of  successive 
supplies  of  clothing  would  go  on  diminishing  in  the  same  way. 
If  the  supply  were  houses  of  increasing  size,  their  utilities 


III.  4.]  THE  CONCEPTION  OF  VALUE.  203 

would  go  on  diminishing.  A  point  would  thus  arise  in  the 
case  of  each  and  every  commodity  at  which  the  utility  of  an 
additional  portion  would  be  so  small  that  it  would  be  indiffer- 
ent whether  a  person  did  or  did  not  undergo  the  labor  or 
privation  necessary  to  command  it.  This  Mr.  Jevons  calls 
final  utility.  Thus  final  utility  is  synonymous  with  value 
which  is  measured  by  price. 

Now,  what  is  ordinarily  bought  and  sold  in  the  market  are 
not  sums  total  comprising  the  whole  of  any  commodity  which 
exists,  but  little  portions  each  of  which  is  insignificant  along- 
side of  the  whole.  It  is  therefore  with  final  utilities  alone 
that  the  operations  of  commerce  and  the  laws  of  economics  are 
commonly  concerned. 

4.  It  is  sometimes  said  that  economics  has  nothing  to  do 
with  anything  but  this  market  value,  and  knows  no  other  meas- 
ure of  value.  Although  this  is  true  in  the  generality  of  cases, 
it  is  a  grave  mistake  to  regard  it  as  universal.  In  any  case 
where  the  question  is  one  respecting  the  effect  of  a  material 
increase  or  diminution  in  the  supply  of  an  article,  the  benefit 
or  injury  cannot  be  expressed  by  the  market  value  of  small 
portions.  For  example,  the  injury  and  suffering  which  would 
be  inflicted  on  mankind  by  a  general  failure  of  the  crops  is 
not  to  be  measured  by  the  market  value  lost.  In  fact  it  would 
be  found  that  the  value  of  a  short  crop  would  exceed  that  of 
an  abundant  one.  So  with  capital.  The  utility  to  non-capital- 
ists of  all  the  capital  accumulated  by  others  is  incomparably 
greater  than  the  interest  they  pay  upon  it.  This  principle  is 
of  special  importance  in  all  cases  where  the  question  at  issue  is 
that  of  a  general  policy  which  will  tend  to  change  quantities 
total  of  any  product.  If  all  the  laborers  of  the  country  should 
combine  together  to  materially  change  the  conditions  of  pro- 
duction, the  corresponding  change  of  value  would  afford  no 
criterion  of  the  benefit  or  injury  to  society.  This  limitation 
upon  the  doctrine  of  value  will  have  important  applications. 


204  TUB  LAWS  OF  SUPPLY  AND  DEMAND.         [III.  6. 

5.  Value  has  a  relation  to  human  needs  which,  although 
commonly  simple  enough,  is  sometimes  seriously  misunderstood. 
Its  origin  depends  on  two  factors,  which  must  be  kept  separate 
in  thought.  These  factors  are  (1)  need  on  the  part  of  man, 
and  (2)  capacity  to  gratify  that  need  on  the  part  of  the  wealth 
valued.  To  a  man  who  is  as  happy  as  he  can  be  and  wants 
nothing,  no  wealth  can  have  any  value.  It  is  only  when  he 
needs  to  better  his  condition  that  value  arises.  The  result  of 
this  is  that  increase  of  value  may  imply  not  only  an  increase  of 
power  to  gratify  our  needs,  but  also  an  increase  of  those  needs. 
By  making  a  man  very  thirsty  and  cutting  off  his  water-supply 
we  give  value  to  water.  By  threatening  to  inundate  him  with 
the  Mississippi  River  we  give  value  to  the  dikes  which  keep 
that  river  from  overflowing  his  fields.  By  clearing  away  the 
forest  we  give  greater  value  to  the  limited  quantity  of  wood 
that  remains.  By  adding  more  people  to  the  number  who  must 
be  fed  from  one  farm  we  increase  the  value  of  the  farm  and 
everything  upon  it.  A  cold  climate  increases  the  value  of 
houses,  shelter,  and  clothing. 

The  result  of  all  this  is  that  although  value  is  the  measure 
of  wealth,  it  is  very  dangerous  to  take  it,  as  is  often  done,  as 
the  measure  of  human  welfare.  It  may  equally  be  the  measure 
of  the  increase  of  human  necessities,  and  it  is  very  difficult  to 
draw  an  exact  line  between  the  two  cases.  It  is  only  when  we 
compare  two  different  values  in  cases  where  men  are  similarly 
situated  that  we  can  say  whether  the  difference  between  the 
values  corresponds  to  the  difference  of  general  welfare.  If  we 
should  find  by  comparing  the  two  States  of  Ohio  and  Indiana 
that  the  wealth  of  one  far  exceeds  that  of  the  other  in  pro- 
portion to  its  population,  we  might  fairly  conclude  that  the 
inhabitants  of  the  wealthier  State  were  on  the  whole  better 
off.  But  we  could  not  make  a  similar  comparison  of  the 
people  of  Switzerland  with  those  of  Minnesota,  because  the 
necessities  of  the  former  lead  them  to  assign  a  higher  value  to 
roads  and  fields  than  these  objecta  possess  in  Minnesota. 


HI.  6.]          THE  ABSOLUTE  STANDARD  OF  VALUE.  205 


CHAPTER  II. 

THE   MEASURE   OF   VALUE   BY   AN   ABSOLUTE   STANDARD. 

6.  WE  have  to  introduce  certain  mathematical  conceptions 
into  this  subject.  One  of  the  most  common  of  these  is  that  of 
one  quantity  varying  directly  or  inversely  as  another  quantity. 
A  simple  example  is  that  of  total  cost  varying  directly  as  price 
per  unit.  If  I  have  to  buy  a  box  of  tea,  then  the  higher  the 
price  per  pound  the  more  I  must  pay  for  the  box.  This  rela- 
tion is  expressed  algebraically  by  saying  that  the  money  I  must 
pay  for  the  tea  is  equal  to  the  product  of  the  price  into  some 
fixed  quantity. 

Let  M  =  the  total  amount  of  money  I  must  pay ; 

P  =  the  price  per  pound. 
Then  the  law  of  relation  is  expressed  by  the  equation 

M=PXC.  (a) 

C  being  the  constant  quantity.  When  we  say  that  C  is  a  con- 
stant quantity,  we  mean  only  this,  that  it  does  not  necessarily 
vary  when  P  varies,  or  that  we  suppose  it  constant  in  order  to 
get  a  relation  between  P  and  M.  In  the  present  example  we 
can  readily  see  what  C  is.  It  is  the  number  of  pounds  of  tea 
in  the  box.  If  this  is  120,  then  we  have  for  the  cost  of  the  tea 
M  =  P  X  120. 

To  take  another  example,  let  us  inquire  what  sum  total  of 
values  can  be  exchanged  by  a  piece  of  money  in  a  year.  Let 
us  put 

E,  the  total  amount  of  exchanges  required ; 

D,  the  number  of  dollars  in  the  coin; 

N,  the  number  of  times  that  the  coin  changes  hands  in  the 
course  of  the  year. 

It  is  evident  that  the  higher  the  value  of  the  coin — that  is, 


206  THE  LAWS  OF  SUPPLY  AND  DEMAND.          [III.  7. 

the  greater  the  value  of  D  —  the  greater  the  value  of  the  ex- 
changes it  will  effect,  other  conditions  being  equal.     Hence 

we  may  write 

E  =  DXC. 

A  very  little  consideration  will  show  that  the  constant  C  is 
equal  to  N,  the  number  of  times  the  coin  changes  hands  in  a 
year.  The  relation  between  the  three  quantities  is  therefore 
expressed  by  the  equation 

E  =  DXK  (I) 

We  may  therefore  also  say  that  the  quantity  of  business 
which  a  coin  will  transact  in  the  course  of  a  year  is  proportional 
to  the  number  of  times  it  changes  hands. 

7.  Inverse  variation  comes  into  play  when  one  quantity  in- 
creases as  another  diminishes.  If  I  have  a  fixed  sum  of 
money,  it  is  evident  that  the  higher  the  price  per  pound  of  an 
article  the  less  of  that  article  my  money  can  buy.  This  rela- 
tion is  expressed  by  saying  that  the  amount  I  can  buy  is  equal 
to  some  quantity  divided  by  the  price  per  pound.  Using  the 
same  notation  as  in  the  first  example  («),  and  putting  Q  for 
the  quantity  I  can  buy,  we  shall  have  in  this  case 


Here  it  is  evident  that  C  represents  the  fixed  sum  of  money 
which  I  have  to  buy  with,  the  same  as  M  in  the  first  example. 
From  equation  (J)  we  derive,  by  an  algebraic  operation, 

E 

N  =  D" 

This  equation  expresses  the  fact  that  if  a  certain  definite 
amount  of  business  is  to  be  transacted  by  a  coin,  then  the 
smaller  the  value  D  of  the  coin  the  greater  the  number  of 
times  it  must  change  hands.* 

*  It  may  appear  to  tbe  student  that  we  are  here  explaining  a  simple  matter 
in  a  complex  way,  since  the  results  are  plainer  than  the  reasoning.  This  is 
true.  The  object  is  to  illustrate  a  principle  which  we  shall  have  to  apply  in 


III.  8.]          THE  ABSOLUTE  STANDARD   OF  VALUE.  207 

8.  In  all  the  above  cases  it  is  obvious  what  the  constant 
quantities  mean.  But  sometimes,  although  we  may  form  a  defi- 
nite idea  of  these  quantities  as  constants,  their  meaning  depends 
upon  a  great  many  conceptions.  One  of  these  conceptions, 
which  we  must  have  at  command,  is  that  of  a  scale  of  prices. 
Suppose  that  the  price  of  everything  next  year  should  be  dou- 
ble its  price  this  year.  Then,  other  conditions  being  equal, 
double  the  amount  of  money  would  be  required  to  buy  and  sell 
the  same  goods,  since  the  amount  of  money  required  for  each 
purchase  necessarily  varies  as  the  price.  By  a  scale  of  prices 
is  meant  a  general  average  of  prices  of  all  goods  bought  and 
sold.  If  this  average  of  prices  increases,  we  say  that  the  scale 
of  prices  increases,  and  vice  versa.  Let  us  call  the  scale  S,  and 
let  us  put  M  for  the  amount  of  money  required  to  make  all  the 
exchanges.  Then,  since  the  higher  the  scale  the  greater  the 
amount  of  money  required,  we  may  write  the  equation 

M  =  SXC,  (c) 

C  being  some  Constant. 

"What  this  constant  is  depends  upon  a  great  many  causes ; 
one  of  which  is  the  total  amount  of  commodities  to  be  bought 
and  sold.  It  also  depends  upon  what  standard  of  comparison 
we  take  for  S ;  that  is,  for  what  scale  of  prices  we  regard  S  as 
equal  to  unity.  But  in  this  case  all  that  is  necessary  is  to  ad- 
here to  a  scale  when  once  adopted.  For  example,  the  scale  of 
prices  was  about  twice  as  high  in  1864  as  it  was  in  1861. 
Hence  it  required  twice  as  much  money  to  transact  a  given 
amount  of  business  in  1864  that  it  did  in  1861.  If  we  call  the 
scale  of  1861  unity,  that  of  1864  will  be  2.  If  we  call  that  of 
1864  unity,  we  had  in  1861  S  =  \. 

It  is  evident  that  the  constant  quantity  in  equation  (c)  de- 
pends upon  and  varies  with  the  total  amount  of  business  to  be 
transacted.  Therefore  if  we  put 

the  future,  namely:  Whenever  one  quantity  varies  as  another,  the  one  may  be 
considered  as  equal  to  the  product  of  the  other  into  some  third  quantity.  Con- 
versely, if  one  quantify  varies  inversely  as  anol/tei;  it  is  equal  to  the  quotient  of 
some  Uiird  quantity  divided  by  Hie  other. 


208  THE  LAWS  OF  SUPPLY  AND  DEMAND.         [HL  9. 

B  =  the  total  amount  of  business, 

•we  may  write 

C  =  BxK, 

K  being  some  other  constant  quantity. 

If  we  substitute  in  equation  (<?),  the  latter  will  become 

M  =  S  x  B  x  K, 

which  means  that  the  quantity  of  money  required  will  vary 
both  as  the  scale  of  prices  and  the  amount  of  business  to  be 
transacted. 

In  all  cases  of  this  sort  we  may  consider  the  algebraic  sym- 
bols as  the  measures  of  certain  economic  causes.  The  effects 
of  these  causes  will  then  be  studied  by  supposing  some  one 
cause  to  vary  while  all  the  others  remain  constant.  Thus  we 
shall  get  the  effect  of  the  variation  in  that  particular  case.  By 
considering  each  of  the  causes  in  succession  to  vary,  we  get  the 
effects  due  to  the  variation  of  all  the  causes.  The  last  equa- 
tion is  an  example  of  introducing  two  varying  causes,  scale  of 
prices  and  quantity  of  business. 

9.  Suppose  the  price  of  everything  to  be  twice  as  high 
this  year  as  last,  while  the  quantity  produced  remains  the 
same.  In  ordinary  language,  it  would  be  said  that  all  values 
had  doubled.  But  it  is  clear  that  really  nothing  would  have 
been  any  more  valuable  or  useful  than  before.  The  measure- 
ment of  values  by  prices  is  therefore  not  entirely  satisfactory. 
To  illustrate  the  exact  nature  of  the  defect,  let  us  suppose  an 
analogous  case  in  measuring  length.  On  getting  up  some  morn- 
ing, a  father  measures  the  heights  of  his  children  with  what 
purports  to  be  a  foot-rule.  He  finds  that  the  boy  who  yester- 
day only  measured  four  feet  now  measures  eight.  Marking 
his  own  height,  he  finds  it  to  be  eleven  feet.  He  might  claim 
that  his  entire  family  was  twice  as  tall  as  yesterday,  and  that 
he  was  himself  a  giant.  But  the  more  reasonable  explanation 
would  be  that  his  supposed  foot-rule  was  only  one  half  its 
proper  length,  and  that  the  actual  size  of  everything  else  re- 
mained unchanged. 


III.  10.]         THE  ABSOLUTE  STANDARD  OF  VALUE.  209 

Now  the  measure  of  values  by  money  is,  in  principle,  simi- 
lar to  the  measure  of  lengths  with  a  rule.  When  we  say  a  man 
is  six  feet  high,  we  mean  that  his  height  is  equal  to  six  of  a 
certain  length  which  we  call  a  foot.  So  when  we  say  that  a 
barrel  of  flour  is  worth  $5,  we  mean  that  its  value  is  equal 
to  five  pieces  of  money  each  of  which  we  call  a  dollar.  In 
order  therefore  that  we  may  never  be  deceived  in  actual  values, 
both  the  foot  and  the  dollar  with  which  our  comparisons  are 
made  must  remain  unchanged.  There  is  no  difficulty  about 
the  foot,  because  it  is  a  material  substance,  and  we  can  readily 
find  matter  which  does  not  vary  in  its  magnitude  from  year  to 
year.  But  since  value  is  only  a  mental  conception,  and  depen- 
dent upon  human  desire,  there  can  be  no  absolute  dollar  to 
compare  with.  The  current  dollar  may  be  variable  in  value, 
as  well  as  a  barrel  of  flour,  and  we  must  Always  remember  that 
calling  a  thing,  whether  metal  or  paper,  one  dollar,  or  one  pound, 
or  one  franc,  no  more  gives  it  a  fixed  value  than  calling  a  stick 
one  foot  makes  it  a  foot  long. 

1O.  Is  there  then  any  way  by  which  we  can  approximate  to 
a  real  standard  of  value  ?  To  show  how  we  may  reach  such  an 
approximation,  let  us  again  return  to  the  case  of  the  foot-rule. 
It  is  very  evident  that  in  the  case  we  have  supposed,  that  of  a 
man  finding  himself  twice  as  tall  as  he  was  before,  common- 
sense  would  tell  him  that  the  rule  with  which  he  measured  was 
only  half  as  long  as  before.  In  other  words,  the  logical  pro- 
cess would  be  to  measure  the  rule  by  the  heights  of  himself  and 
children  instead  of  measuring  them  by  the  rule.  If  he  found 
that  yesterday  the  combined  measures  of  himself  and  of  his 
children  were  16  feet,  while  to-day  they  all  together  measured  20 
feet,  he  would  conclude  that  the  rule  to-day  was  shorter  than  it 
was  yesterday  in  the  ratio  20  : 16,  or  that  it  had  shrunk  20  per 
cent.  This  result  would  indeed  rest  on  the  assumption  that 
there  was  no  actual  change  in  the  heights  of  the  family,  and 
whatever  error  this  assumption  might  be  subject  to,  the  same 
error  would  his  result  be  subject  to.  It  is  evident  that  in  the 


210  1'UE  LAWS  OF  SUPPLY  AND  DEMAND.        [III.  11. 

case  supposed  the  errors  arising  from  this  assumption  would  be 
much  less  than  that  arising  from  the  supposition  that  the  length 
of  the  measure  was  invariable. 

In  the  same  way,  in  devising  an  absolute  standard  of  value 
the  most  logical  process  is  to  suppose  that  the  general  or  aver- 
age values  of  commodities  remain  unchanged  from  year  to  year, 
and  that  a  general  rise  or  fall  in  prices  is  caused  by  a  diminu- 
tion or  increase  in  the  value  of  the  dollars  in  which  the  price 
is  expressed.  Now,  if  the  changes  thus  indicated  were  the 
same  with  all  commodities,  that  is,  if  all  prices  rose  or  fell  ex- 
actly in  the  same  proportion,  there  would  be  no  difficulty.  But 
as  a  matter  of  fact  we  never  find  this  to  be  the  case.  We  must 
therefore  seek  for  some  general  average  which  shall  be  as  near 
as  possible  to  what  we  want.  One  possible  hypothesis  would 
be  this :  We  might  assume  that  the  absolute  value  of  every- 
thing produced  by  the  population  of  the  country  remains  un- 
changed except  that  as  population  increases  the  total  value 
produced  increases  in  the  same  ratio.  In  other  words,  we 
may  suppose  the  average  productiveness  of  each  individual  to 
remain  the  same  from  year  to  year. 

If  then  we  could  determine  the  total  money  value  of  all  that 
is  produced  by  all  the  inhabitants  of  the  country,  and  divide 
the  result  by  60,000,000,  or  such  other  number  as  might  ex- 
press the  total  population,  we  should  have  for  the  quotient  a 
certain  number  of  dollars  which  would  be  the  average  produc- 
tiveness of  each  individual,  measured  in  current  money.  If  we 
found  this  average  to  fluctuate  from  year  to  year,  we  should 
conclude  that  it  was  due  to  changes  in  the  value  of  the  dollar 
with  which  the  value  produced  was  measured. 

11,  The  Tabular  Standard  of  Valiie.  As  a  matter  of 
fact  it  is  impossible  to  determine  the  total  productiveness  as 
just  defined  with  any  approach  to  accuracy.  We  cannot  learn 
what  every  man  is  doing  or  making  by  any  system  of  inquiry. 
The  next  best  course  is  to  take  as  our  standard  of  comparison 
the  value  of  a  certain  number  of  the  great  staples  of  life. 


III.  11.]         THE  ABSOLUTE  STANDARD  OF  VALUE. 


211 


Flour  is  one  of  these.  In  the  city  of  New  York  a  barrel  of 
flour  which  sold  for  $5  in  the  year  1883  would  only  bring 
$4  in  1885.  If  we  regard  tho  value  of  the  dollar  as  in- 
variable, we  should  say  that  the  value  of  the  flour  was  20  per 
cent  less  in  the  latter  year  than  in  the  former.  But  if  we 
regard  the  value  of  the  flour  as  invariable,  then  we  should  say 
that  the  value  of  the  dollar  was  25  per  cent  greater  in  1885 
than  in  1883. 

Instead  of  depending  on  flour  alone  for  a  comparison,  we 
should  take  all  commodities  which  are  consumed  in  appre- 
ciable quantities.  The  table  below  will  show  the  method  bet- 
ter than  any  amount  of  description.  We  have  here  a  list  of 
twenty  articles  of  nearly  universal  consumption.  Of  each  ar- 
ticle we  take  what  we  may  suppose  to  be  a  rude  approximation 
to  the  quantity  which  a  person  may  consume  in  a  year.  To 
discover  the  actual  average  amount  consumed  by  each  person 

TABLE  SHOWING  THE  PRICE  OF  A  CERTAIN  COLLECTION  OP  THE  NECES- 
SARIES OF  LIFE,  AT  NEW  YORK,  IN  THE  YEARS  1876,  1880,  AND  1884. 


1876. 

1880. 

1884. 

1  barrel  corn-meal  

$3  68 

$2  80 

$3  24 

2  barrels  flour  

12  42 

11  76 

11  18 

1000  bricks  

7  72 

7  78 

7  59 

500  feet  lumber  

7  40 

8  53 

1  ton  coal  

5  53 

3  47 

4  70 

20  Ibs.  cotton  

2  58 

2  80 

2  10 

^  ton  hay  

8  00 

7  52 

9  16 

2  cwt.  ice  

0  34 

0  30 

0  23 

1  cwt.  pig-iron  

1  34 

2  06 

1  28 

2  pair  shoes  

5  60 

4  68 

4  80 

100  1  bs.  beef  

9  00 

8  80 

9  90 

100  Ibs.  pork  

10  60 

6  20 

7  90 

30  Ibs.  butter  

7  20 

5  10 

5  40 

10  dozen  eggs  

2  80 

1  60 

2  10 

10  bushels  potatoes  

6  12 

7  50 

6  75 

40  Ibs.  rice  

2  84 

2  92 

2  40 

1  bushel  salt  

0  36 

0  30 

0  39 

100  Ibs.  sugar  

10  70 

9  00 

7  10 

2  98 

2  98 

3  58 

10  Ibs.  wool  

3  30 

3  go 

3  00 

Total  

$111  66 

f  98  27 

$101  33 

212  THE  LAWS  OF  SUPPLY  AND  DEMAND.        [III.  11. 

•would  be  a  difficult  problem,  and  the  quantities  in  the  table 
must  be  considered  as  only  rude  guesses,  the  object  being  to 
illustrate  the  principle  and  not  to  give  a  fact  with  the  utmost 
exactness.  With  each  article  is  given  the  cost  of  the  assumed 
quantity  from  the  wholesale  price  in  the  city  of  New  York  at 
certain  periods  separated  by  four  years.  The  numbers  given 
are  the  averages  during  the  years  ending  June  30th,  of  1876, 
1880,  and  1884.  The  prices  are  taken  from  the  reports  of  the 
Bureau  of  Statistics  of  the  Treasury  Department. 

Adding  up  the  several  columns,  we  find  that  the  collection 
of  commodities  described  in  the  table  cost  $111.66  in  1876; 
$98.27  in  1880  ;  and  $101.33  in  1884. 

We  now  proceed  on  the  supposition  that  the  real  value  of 
this  collection  of  articles  remains  unchanged.  But  when  meas- 
ured in  dollars  the  value  was  less  by  12  per  cent  at  the  second 
epoch  than  at  the  first.  From  this  it  would  follow  that  each 
dollar  was  worth  about  13  per  cent  more  in  1880  than  in  1876. 
From  1880  to  1884  there  was  a  slight  increase  in  the  amount 
of  money  necessary  to  purchase  the  collection.  We  therefore 
conclude  that  during  that  period  there  was  a  slight  deprecia- 
tion in  the  value  of  the  dollar.  It  is  probable  that  since  1884 
the  value  of  the  dollar  has  again  been  slightly  increasing,  so 
that  less  money  would  purchase  the  collection  now  than  was 
required  during  that  year. 

To  perfect  this  table  many  additions  and  modifications  are 
necessary.  We  should  include  the  rate  of  wages  paid  to  vari- 
ous classes  of  laborers  whenever  it  can  be  exactly  determined. 
But  in  estimating  the  rate  of  wages  it  would  be  necessary  to 
take  into  account  the  unemployed  as  well  as  the  employed. 
Suppose,  for  example,  that  out  of  ten  carpenters  eight  were 
getting  $2  per  day,  while  two  were  unemployed.  Then  the 
average  wages  of  the  carpenters  would  be  $1.60  and  not  $2. 
The  wages  of  domestic  servants,  washerwomen,  and  other 
classes  who  render  personal  services  would  also  have  to  be 
taken  into  account.  Manufactured  articles,  clothing  for  ex- 
ample, should  be  more  fully  represented. 


IH11.]         THE  ABSOLUTE  STANDARD  OF  VALVE.  213 

One  source  of  error  in  drawing  conclusions  from  such  a  table 
can  be  more  easily  seen  than  avoided.  The  improvements  con- 
stantly being  made  in  manufactures  lead  to  their  being  really 
cheaper  when  measured  in  terms  of  human  labor,  which  is  our 
proper  ultimate  standard.  This  improvement  should  be  allowed 
for,  if  possible,  by  increasing  the  quantities  in  our  standard  col- 
lection. 

As  a  general  rule  the  changes  of  value  to  which  our  current 
dollar  is  subject  are  very  little  noticed  or  considered  by  the 
public  at  large.  Yet,  as  we  shall  hereafter  see,  nothing  is  more 
essential  to  enable  us  to  understand  the  condition  of  the  social 
organism  than  this  knowledge.  The  value  of  the  dollar  ought 
to  be  determined  from  month  to  month  by  some  central  au- 
thority and  made  known  to  the  public. 

It  will  be  remarked  that  the  changes  in  the  amounts  of 
money  necessary  to  purchase  the  tabular  collection  of  com- 
modities correspond  to  the  changes  in  the  general  scale  of 
prices  defined  in  §  8.  The  relation  between  this  scale  and 
the  absolute  value  of  the  dollar  may  be  stated  as  follows : 

The  absolute  value  of  the  dollar  varies  inversely  as  the 
scale  of  prices. 

It  should  also  be  remarked  that  the  conception  which  we 
have  called  "  absolute  value  of  the  dollar"  is  frequently  called 
"  purchasing  power."  This  popular  form  of  expression  is  well 
adapted  to  give  a  clear  notion  of  the  subject,  since  any  one  un- 
derstands how  a  dollar  may  purchase  more  at  one  time  than  at 
another. 

Both  the  scale  of  prices  and  the  purchasing  power  at  any 
time  may  be  represented  by  numbers,  the  values  of  those 
quantities  at  any  arbitrary  epoch  being  taken  as  unity.  Thus 
we  should  have,  taking  1880  as  unity : 

1876.  1880.          1884. 

Scale  of  prices l.U        1.00        1.03 

Purchasing  power 0.88         1.00        0.97 

A  standard  of  value  fixed  in  this  way,  by  the  prices  of  com- 
modities, has  been  called  a  tabular  standard  of  value. 


214  TUB  LAWS  OP  SUPPLY  AND  DEMAND.        [III.  12. 

12.  It  has  been  proposed  to  adopt  a  tabular  standard  of 
valne  as  that  for  the  payment  of  debts  which  are  due  only  at 
the  end  of  long  periods  of  time.  The  public  debts  of  the  prin- 
cipal nations  of  the  world  have  gone  on  for  several  generations ; 
ground-rents  in  our  great  cities  have  sometimes  been  continued 
for  a  hundred  years  or  more.  In  these  cases  the  essential  condi- 
tion of  the  contract  is  that,  in  consideration  of  a  service  rendered 
at  one  time,  the  party  receiving  it  agrees  to  pay  a  sum  of 
money  at  some  distant  future  time.  The  objection  to  this  sys- 
tem is  that  no  one  knows  what  the  absolute  value  of  the  money 
will  be  when  the  time  of  payment  comes.  We  know  as  a  mat- 
ter of  history  that  great  changes  in  the  value  of  the  monetary 
unit  have  occurred,  and  can  sometimes  trace  their  causes.  The 
great  additions  to  the  gold  supply  of  the  world  made  by  the 
discovery  of  gold  in  California  and  Australia  in  1848  and  1850 
resulted  in  a  diminution  of  the  value  of  the  dollar.  Hence 
when  old  debts  were  paid  during  the  few  years  preceding  1860, 
the  creditor  received  a  less  value  than  he  supposed  he  would 
get.  During  our  civil  war  paper  dollars  were  issued  in  such 
quantities  that  their  value  fell  to  one  half  that  of  the  gold 
dollar  or  less.  One  half  of  all  old  debts  payable  during  1864 
may  be  said  to  have  been  forfeited.  During  the  years  1865  to 
1880  there  appears  to  have  been  a  pretty  steady  appreciation  in 
the  dollar.  The  result  was  that  everybody  who  during  the 
years  1863  to  1865  contracted  debts  payable  now  has  to  pay 
double  the  value  on  which  he  based  his  agreement. 

Now,  one  object  of  the  tabular  standard  of  value  is  to  ar- 
range an  equitable  system  for  the  payment  of  such  debts.  This 
system  is  in  brief  that  of  providing  that  the  payments  shall  be 
made,  not  in  so  much  gold,  silver,  or  other  current  money,  but 
shall  consist  of  such  a  quantity  of  the  current  money  as  shall 
purchase  a  stipulated  collection  of  commodities. 


III.  13.]      THE  RELATION  OF  PRICE  AND  DEMAND.  215 


CHAPTER  III. 

THE   RELATION    OF   PKICE   AND   DEMAND. 

13.  THE  laws  which  \ve  have  to  consider  in  this  chapter  are 
so  wide-reaching  in  their  operation  that  they  may  be  justly  re- 
garded as  the  fundamental  ones  of  economic  science.  In  ac- 
cordance with  a  general  principle  of  scientific  method,  we  have 
to  begin  the  study  of  these  laws  by  showing  how  they  operate 
in  the  simplest  cases.  What  these  cases  are  will  be  seen  by 
recalling  the  principal  industrial  and  commercial  operations  as 
they  have  already  been  described.  These  operations  consist, 
in  brief,  in  producing  goods,  taking  them  to  market,  and  sell- 
ing them  to  persons  who  want  to  use  them.  In  the  case  of 
most  products  a  number  of  sales  are  necessary,  because  nearly 
every  person  who  makes  anything  has  to  buy  the  materials 
with  which  to  make  it,  and  after  it  is  made  it  may  pass  through 
several  owners  before  reaching  the  final  consumer.  The  sim- 
plest case  which  will  include  all  the  elementary  operations  is 
that  in  which  a  commodity  is  made  by  some  producer,  brought 
to  market,  sold  by  the  producer  to  a  dealer,  and  by  him  to  the 
person  who  is  to  consume  the  commodity.  In  this  case  there 
are  two  exchanges.  The  difference  between  the  prices  at 
which  the  two  sales  are  made  will  represent  the  profits  and  ex- 
penses of  the  dealer. 

Let  us  take  the  purchase  and  sale  of  flour  as  an  example. 
In  accordance  with  what  has  been  said,  we  have  three  classes 
of  people  to  deal  with  : 

I.  Producers  of  flour.  These  producers  actually  comprise 
farmers,  millers,  and  dealers.  But,  to  make  our  first  considera- 
tion as  simple  as  possible,  we  shall  combine  them  all  together  in 
the  persons  of  the  one  class  who  bring  the  flour  to  market  and 
sell  it. 


216  TUB  LAWS  OF  SUPPLY  AND  DEMAND.        [III.  13. 

II.  The  dealers  who  purchase  the  flour  from  the  producers. 

III.  The  consumers  of  flour,  who  purchase  it  from  the  deal- 
ers in  order  to  make  it  into  bread  for  consumption. 

Still  further  to  fix  the  ideas,  we  shall  take  the  city  of  New 
York  as  an  example  of  a  market.  In  and  near  this  city  there 
is  a  population  of  some  2,000,000  to  be  supplied  with  flour. 
Then  the  classes  of  people  above  described  will  be,  firstly, 
those  who  are  bringing  flour  to  New  York  for  sale;  second!}-, 
the  dealers  who  purchase  it  at  wholesale;  thirdly,  the  two 
millions  of  people  who  are  buying  it  from  the  dealers  to  eat. 

There  are  in  reality  many  grades  of  flour,  and  the  prices  of 
different  grades  will  differ.  But,  to  make  our  first  example  as 
simple  as  possible,  we  shall  suppose  but  a  single  average  grade. 

Since  the  dealers  are  the  owners  of  all  the  flour  they  sell,  or 
act  as  agents  of  the  owners,  we  may  consider  them  at  liberty 
to  charge  what  price  they  please.  But  the  quantity  which 
they  can  sell  depends  upon  the  price  they  charge.  The  rela- 
tion between  the  price  and  the  sales  may  be  called  the  law  of 
price  and  demand,  and  is  such  that  the  higher  the  price  the 
less  the  quantity  which  can  be  sold. 

The  reason  of  this  law  is  that  every  rise  in  price  will  lead  to 
economy  and  retrenchment  on  the  part  of  consumers.  The 
diminution  in  the  amount  sold  arises  in  two  ways : 

Firstly,  by  leading  consumers  to  be  more  economical  in  the 
use  of  flour,  eating  and  wasting  less  bread. 

Secondly,  by  leading  them  to  employ  substitutes  for  flour, 
such  as  corn-meal,  oat-meal,  or  potatoes. 

We  readily  see  that  the  diminution  in  the  consumption  aris- 
ing from  an  increase  of  the  price  will  be  different  with  differ, 
ent  classes  of  consumers.  The  wealthy  do  not  take  any  account 
of  the  price  of  flour  in  determining  whether  they  shall  or  shall 
not  eat  bread.  The  lower  we  descend  in  the  scale  of  wealth 
the  more  rigorous  the  economy  which  must  be  practised,  and 
the  greater  the  diminution  in  consumption  which  will  be  caused 
by  a  rise  in  price. 


III.  14.]     THE  RELATION  OF  PRICE  AND  DEMAND.  217 

14.  "We  now  Lave  the  following  definitions  of  certain  words 
which  will  be  in  almost  constant  use. 

By  market  is  meant  a  place  or  region  where  one  or  more 
commodities  are  bought  and  sold  on  a  large  scale.  Chicago 
and  New  York  are  great  wheat  markets.  Many  thousands  of 
farmers  in  the  Northwestern  States  send  their  wheat  to  the 
former  city  for  sale,  while  American  and  European  dealers  pur- 
chase wheat  or  flour  in  New  York.  The  essential  feature  of  a 
market  is  that  the  price  of  the  commodity  is  publicly  known, 
so  that  everybody  knows  very  nearly  at  what  price  other  peo- 
ple are  buying  and  selling. 

By  the  supply  of  a  commodity  is  meant  the  quantity  of 
that  commodity  brought  to  any  market  for  sale.  For  example, 
if  we  find  that  there  are  to-day  100,000  bushels  of  wheat  in 
Chicago  awaiting  purchasers,  we  might  say  that  the  supply  to- 
day is  100,000  bushels.  But  it  is  better  to  consider  the  supply 
as  the  total  quantit}r  brought  to  market  for  sale  in  the  course  of 
a  year,  or  other  unit  of  time,  rather  than  as  a  stock  on  hand. 

By  the  demand  for  a  commodity  is  meant  the  quantity 
of  that  commodity  which  can  be  actually  sold  in  any  market  at 
any  given  price  during  a  year  or  other  unit  of  time. 

We  must  carefully  distinguish  between  this  economic  signifi- 
cation of  the  term  demand  and  the  popular  one,  which  merely 
implies  desire  to  purchase.  No  amount  of  mere  desire  for  a 
commodity  is  sufficient,  in  itself,  to  constitute  a  demand.  The 
latter  arises  only  when  the  person  desiring  has  the  means  as  well 
as  the  willingness  to  purchase.  "  There  is  no  demand,  economi- 
cally speaking,  in  the  hungry  eyes  of  a  penniless  boy  looking 
at  tarts  through  a  pastry-cook's  window.  Without  pennies  an 
unlimited  longing  and  passion  for  their  consumption  would  not 
permit  that  boy  to  contribute  aught  to  the  demand  for  tarts." 

Introducing  the  word  demand,  the  law  of  price  and  demand 
which  we  have  already  mentioned  may  be  expressed  as  follows  : 

FIRST  LAW:  Other  conditions  being  equal,  demand  varies 
with  price  in  such  a  manner  that  as  the  price  increases  demand 
diminishes,  and  vice  versa. 


218  T11E  LAWS  OF  SUPPLY  AND  DEMAND.        [III.  15. 

Universal  Applicability  of  the  Law  of  Price  and  De- 
mand. The  law  of  diminished  demand  witli  increased  price 
applies  not  only  to  goods  bought  and  sold  in  market,  but  to 
every  form  of  service  for  which  people  pay  money.  If  hack- 
men  charge  too  much  for  the  use  of  their  carriages,  fewer  peo- 
ple will  employ  them  and  more  people  will  walk  or  take  the 
street-cars.  If  a  theatrical  manager  puts  the  price  of  his 
tickets  too  low,  more  people  will  apply  for  them  than  the  thea- 
tre will  hold  ;-  if  he  sets  the  price  too  high,  some  of  the  seats 
will  be  empty.  If  bricklayers  demand  higher  wages,  fewer 
people  can  afford  to  build  houses.  By  lowering  their  wages 
the  number  of  people  who  can  afford  to  employ  them  is  in- 
creased. When  a  Washington  newsboy  finds  the  day  passing 
away  without  his  supply  of  New  York  papers  being  disposed 
of,  he  lowers  the  price  from  five  to  three  or  two  cents,  know- 
ing that  he  may  thus  sell  at  a  low  price  papers  which  he  would 
otherwise  have  to  lose  entirely. 

15.  Sensitive  and  Insensitive  Commodities.  Let  us  next 
inquire  whether  we  can  make  any  approximate  estimate  of  how 
much  the  demand  will  fall  off  with  a  given  increase  of  price. 
First  let  us  see  why  it  falls  off  at  all.  The  reason  is  that  the 
income  of  people  in  general  is  limited.  If,  therefore,  prices 
rise  without  any  general  increase  of  income,  it  will  be  impossi- 
ble for  individuals  to  purchase  the  same  amount  of  everything 
as  before.  The  fundamental  question  we  have  been  consider- 
ing is,  How  will  demand  vary  with  price,  all  other  conditions 
being  equal  ?  Among  the  other  conditions  which,  by  hypothe- 
sis, remain  equal  are  the  incomes  of  the  purchasers.  Since, 
then,  each  man  has  an  equal  amount  of  money  to  spend  whether 
the  price  be  high  or  low,  the  sum  total  which  he  can  purchase 
with  his  money  will  vary  inversely  as  the  price.  For  instance, 
if  prices  should  all  be  doubled,  he  could  purchase  on  the  aver- 
age only  half  as  much  as  before.  We  may  now  reasonably 
suppose  as  an  average  rule  that  the  result  will  be  the  same  for 
each  separate  commodity  that  it  is  for  things  in  general;  that  is, 


III.  15.]     THE  RELATION  OF  PRICE  AND  DEMAND.  219 

that  the  quantity  sold  or  demanded  will  vary  inversely  as  the 
price.  For  example,  if  it  is  a  question  of  how  many  peaches  a 
man  will  purchase  for  his  table,  we  may  suppose  that  each  per- 
son will  be  willing  in  the  course  of  the  summer  to  reserve  a 
certain  definite  amount  of  his  income  for  buying  peaches. 
Then  if  the  price  is  one  half  the  usual  one,  he  will  buy  twice 
as  many  as  before ;  and  if  it  is  double,  he  will  buy  one  half  as 
many. 

However  sound  this  rule  may  be  in  its  application  to  the 
general  average  of  all  the  things  exchanged,  we  cannot  suppose 
it  to  be  true  of  each  commodity  considered  separately.  For 
both  as  a  matter  of  fact  and  by  reason  we  know  that  the  de- 
mand for  some  commodities  will  fall  off  much  more  than  that 
for  others  in  consequence  of  a  given  increase  of  price.  "We 
need  words  to  express  these  differences,  and  therefore  shall 
adopt  the  following  definitions : 

Sensitive  commodities  are  those  the  demand  for  which  falls 
off  most  when  the  pi-ice  is  raised. 

Insensitive  commodities  are  those  the  demand  for  which  is 
but  little  changed  by  changes  in  price. 

We  readily  see  that  those  commodities  will  be  insensitive  on 
which  consumers  have  the  least  ability  or  the  least  inducement 
to  economize.  A  few  examples  will  make  this  clear. 

Pepper,  mustard,  and  table  condiments  generally  will  be 
insensitive  because  their  cost  is  insignificant.  Tobacco  is  in- 
sensitive because  a  man  who  becomes  addicted  to  it  finds  it  so 
difficult  to  give  it  up  that  he  would  rather  economize  on  some- 
thing else  if  the  price  of  tobacco  rises.  Nearly  the  same  re- 
mark applies  to  wines  and  spirituous  liquors,  so  far  as  their  use 
as  beverages  is  concerned. 

Food  considered  as  a  whole  is  an  insensitive  commodity,  be- 
cause it  is  most  difficult  for  any  one  to  go  with  much  less  than 
his  accustomed  quantity.  But  if  the  price  of  only  one  particu- 
lar kind  of  food  rises,  it  might  prove  to  be  sensitive,  because 
some  other  kind  would  be  substituted  for  it.  For  example,  if 
the  price  of  potatoes  rises,  bread  can  be  eaten  instead  of  pota- 


220  THE  LAWS  OF  SUPPLY  AND  DEMAND.        [III.  16. 

toes,  and  vice  versa.  So  one  kind  of  bread  or  meal  can  be 
used  instead  of  another.  But  if  the  prices  of  all  sorts  of  food 
should  rise  in  the  same  proportion,  there  would  be  no  motive 
to  substitute  one  for  the  other,  and  people  would  have  to 
economize  on  something  else. 

On  the  other  hand,  clothing,  especially  fine  clothing,  is  proba- 
bly a  sensitive  commodity.  Most  people  could  make  their  old 
clothes  last  a  good  deal  longer  than  they  do  ;  there  is  there- 
fore a  strong  inducement  to  buy  fewer  fine  clothes,  or  no  fine 
clothes  at  all,  when  the  price  rises.  The  same  is  true  of  those 
luxuries  which  people  indulge  in  only  as  their  means  increase. 

As  we  ascend  in  the  scale  of  luxury  we  find  that  the  demand 
for  commodities  depends  more  and  more  on  the  cost  of  things 
below  them  in  that  scale,  and  therefore  proportionally  less  on 
their  own  cost.  Hence  we  cannot  strictly  classify  them  as 
being,  in  themselves,  sensitive  or  insensitive. 

Investments  and  other  forms  of  capital  are  a  case  in  point. 
Many  people  save  up  a  part  of  their  annual  income  to  be  in- 
vested in  bonds,  stocks,  and  other  interest-bearing  securities. 
If  then  the  price  of  anything  which  they  deem  necessary  rises, 
they  may  stop  saving  and  spend  their  surplus  income  in  paying 
the  increased  price  for  the  necessary  articles  of  current  con- 
sumption. This  will  tend  to  make  the  necessaries  and  small 
luxuries  of  life  less  sensitive  than  the  average,  because  bv 

«~     /  •/ 

economizing  in  investments  and  costly  luxuries  consumers  will 
have  more  money  to  spend  on  other  things. 

16.  Reaction  of  Demand  on  Price.  In  what  precedes 
we  have  compared  the  effect  of  different  scales  of  prices  for  a 
commodity  when  the  general  conditions  which  exist  in  the 
market  remain  unaltered.  Our  conclusion  has  been  a  law 
according  to  which  a  cause  which  changes  the  price  of  a  com- 

cj  O  i 

modity,  without  at  the  same  time  changing  anything  else,  will 
change  the  demand.  This  limitation  is  expressed  by  the  con- 
dition "other  things  being  equal."  Although  other  conditions 
are  always  equal  for  the  time,  yet  as  a  matter  of  fact  they  do 


III.  17.]     THE  RELATION  OF  PRICE  AND  DEMAND.  221 

not  remain  equal  from  one  time  to  another.  That  is  to  say, 
although  it  is  certain  that  to-day,  or  any  other  day,  more  flour 
can  be  sold  at  $5  per  barrel  than  at  $5.10,  yet  it  is  possible 
that  more  can  be  sold  at  $5.10  to-morrow  than  can  be  sold  at 
$5  to-day.  Some  new  use  may  be  found  for  flour,  or  it  may 
suddenly  be  wanted  to  make  up  a  failure  of  the  crops  in  Eu- 
rope. Then  there  will  be  an  increase  of  demand,  even  if  the 
price  should  remain  unaltered  or  should  be  raised.  Since  in 
this  case  a  greater  quantity  can  be  sold  at  the  old  price,  dealers 
will  be  able  to  increase  the  price,  while  at  the  same  time  sell- 
ing a  greater  quantity  than  before.  Self-interest  will  prompt 
them  to  do  this.  Hence  we  have  a  second  general  law  : 

Other  conditions  being  equal,  an  increased  demand  for  any 
commodity  increases  its  market  price. 

Combining  this  law  with  the  other,  we  see  the  nature  of  the 
mutual  interaction  between  price  and  demand.  Weak  reason- 
ers  sometimes  find  it  hard  to  see  that  increase  of  price  causes 
diminished  demand,  and  that  diminished  demand  diminishes 
price.  In  reality  this  mutual  interaction  is  necessary  to  equili- 
brium. If  increase  of  price  acted  on  demand  so  as  to  increase 
it  also,  we  should  have  an  increasing  price  causing  an  increased 
demand  ;  this  iacreased  demand  would  again  increase  the  price, 
and  so  the  two  would  go  on  increasing  without  stopping.  Evi- 
dently this  can  never  be  the  case.  But  since  the  actual  rule  is, 
increasing  price  diminishes  demand,  this  diminished  deman^ 
tends  to  diminish  the  price ;  a  state  of  equilibrium  is  reached 
between  the  opposing  forces  ;  a  rise  of  price  is  checked  by  the 
fallling  off  of  demand,  and  falling  price  is  stopped  by  stimulat- 
ing demand,  which  keeps  it  from  falling  without  limit. 

17.  Our  next  inquiry  is  how  the  two  preceding  laws  con- 
necting price  and  demand  are  to  be  modified  so  as  to  apply  to 
the  actual  way  in  which  business  is  done.  The  case  to  which 
the  laws  apply  without  modification  is  that  when  the  demand 
which  we  consider  comes  from  the  people  who  actually  con- 
sume the  products,  and  when  the  price  which  we  consider  is 


222  TEE  LAWS  OF  SUPPLY  AND  DEMAND.        [III.  18. 

what  those  people  have  to  pay.  Of  course  this  price  is  gener- 
ally the  retail  price.  Now,  will  the  same  law  apply  in  the 
wholesale  markets,  and  in  those  cases  in  which  large  purchases 
of  goods  are  made,  not  for  purposes  of  consumption  by  the 
producer,  but  for  re-manufacture  into  other  things  ? 

Granting  that  consumption  and  retail  prices  are  connected 
by  the  laws  already  laid  down,  we  remark  that  the  retail  and 
wholesale  prices  necessarily  vary  together,  so  that  the  con- 
sumption must  indirectly  depend  upon  the  wholesale  price. 
Now,  although  it  is  not  always  true  that  the  retail  price  varies 
immediately  with  every  change  in  the  wholesale  price,  yet 
these  two  prices  must  in  the  long-run  correspond  to  each  other, 
at  least  in  the  case  of  the  great  staples  of  life.  Suppose  a 
grocer  to  purchase  flour  at  $4  and  to  sell  it  at  $4.25.  It  is  cer- 
tain that  if  the  wholesale  price  is  increased  25  cents,  he  cannot 
continue  to  sell  at  the  same  price  as  before.  If  the  wholesale 
price  falls,  he  will  have  to  lower  his  price  in  a  corresponding 
degree,  or  other  dealers  will  undersell  him  and  he  will  lose  his 
customers.  Thus,  as  a  general  rule,  the  profit  in  selling  at  re- 
tail will  be  the  lowest  which  will  permit  the  retail  dealers  to 
meet  all  the  expenses  of  their  business  and  compensate  them- 
selves for  their  labor  and  skill.  The  modifications  to  which 
this  general  rule  is  subject  will  be  considered  in  future  chap- 
ters. We  therefore  conclude  that,  as  a  general  rule,  the  de- 
mand will  increase  as  the  wholesale  price  diminishes,  and  vice 
versa,  because  the  wholesale  and  retail  prices  vary  together. 

18.  Equilibrium  of  Supply  and  Demand.  In  a  normal 
state  of  things  the  price  will  be  so  adjusted  as  to  preserve  an 
equilibrium  between  the  supply  and  demand.  To  return  to 
our  illustration,  suppose  that,  the  price  of  flour  being  $5  per 
barrel,  the  dealers  of  New  York  find  that  the  quantity  which 
comes  into  their  market  is  sold  nearly  as  fast  as  it  arrives ;  there 
will  then  be  no  occasion  for  a  change  in  either  the  supply,  the 
demand,  or  the  price.  Suppose  then  that  there  is  an  unusually 
good  crop,  or  that  from  any  cause  whatever  an  increased  supply 


in.  19.J     THE  RELATION  OF  PRICE  AND  DEMAND.  223 

is  brought  to  market,  the  conditions  of  the  market  otherwise  re- 
maining the  same.  The  result  will  be  that  so  long  as  the  price 
remains  at  $5  the  increased  supply  will  accumulate  on  their 
hands.  In  order  to  get  rid  of  it  they  will  be  obliged  to  lower  the 
price.  This  will  cause  an  increased  demand  both  at  home  and 
abroad,  according  to  the  first  law.  The  normal  equilibrium 
will  be  reached  when  the  price  is  so  fixed  that  the  increased 
demand  thus  caused  exactly  balances  the  increased  supply. 

Suppose,  secondly,  that  instead  of  an  increased  supply  there 
is  a  diminution  in  the  supply.  Then  the  people  who  go  to 
market  offering  $5  per  barrel  cannot  all  be  supplied.  To  de- 
cide who  shall  be  supplied,  the  dealers  raise  the  price.  This 
action  will,  by  the  first  law,  diminish  the  demand.  The  nor- 
mal price  will  be  that  which  brings  the  demand  down  to  the 
supply. 

To  illustrate  the  second  law,  let  us  consider  that  the  supply 
remains  constant,  but  that  the  change  occurs  in  the  demand. 
Suppose  that  owing  to  a  failure  of  the  European  crop  there  is 
an  increased  demand.  The  immediate  result  will  be  exactly 
the  same  as  in  the  case  of  a  diminished  supply.  The  demand 
cannot  be  entirely  satisfied  and  the  price  must  be  raised.  The 
rise  in  price  will  have  the  double  effect  of  increasing  the  sup- 
ply and  diminishing  the  demand.  When  they  are  equalized 
equilibrium  will  be  restored. 

19.  Discounting  the  Market.  The  sale  of  goods  at  retail 
for  consumption  generally  goes  on  at  a  very  regular  rate.  But 
in  the  wholesale  market  the  changes  may  be  sudden  to  any  ex- 
tent, the  exchanges  being  determined  not  merely  by  the  present 
price,  but  by  the  judgment  of  men  as  to  what  the  price  or  the 
supply  is  going  to  be  in  the  future.  If,  in  the  opinion  of  a 
wholesale  dealer,  the-  price  of  wheat  is  going  to  rise  five  per 
cent  within  the  next  three  months,  he  will  at  once  proceed  to 
purchase  a  large  stock.  If  it  is  going  to  fall,  he  will  make  no 
more  purchases  than  are  necessary  for  his  present  business,  but 
will  rather  make  contracts  to  sell  wheat  three  months  hence 


224  THE  LAWS  OF  SUPPLY  AND  DEMAND.        [III.  19. 

which  he  has  not  yet  bought,  but  which  he  intends  to  buy  at 
the  lower  price.  Since  all  the  wholesale  dealers  proceed  on 
the  same  system,  it  follows  that  the  prospect  of  a  future  rise 
in  price  will  cause  a  present  rise.  If  reports  show  the  proba- 
bility of  a  short  crop,  then,  although  a  year  may  elapse  before 
the  scarcity  will  be  felt,  an  immediate  rise  of  price  will  result. 
This  will  be  true  even  if  the  short  crop  is  that  of  some  foreign 
country,  because  then  that  country  will  demand  more  wheat 
from  us.  The  act  of  purchasing  according  to  an  expected 
price  is  called  discounting  the  market.  The  effect  of  this 
cause  is  to  make  prices  more  steady  than  they  would  be  if  no 
account  were  taken  of  the  future  supply  and  demand.  The 
wholesale  dealers  in  the  great  markets  adjust  their  price,  not  to 
the  supply  and  demand  of  to-day,  but  to  the  probable  supply 
and  demand  of  the  future.  They  make  the  adjustment  so  that 
in  the  long-run  the  consumption  shall  as  nearly  as  possible  bal- 
ance the  production. 

Speculative  Transactions.  In  the  regular  course  of  trade  all 
commodities  may  be  considered  as  passing  from  hand  to  hand 
only  in  one  direction.  If  A  sells  wheat  to  B,  it  ought  to  be 
because  A  is  in  nearer  communication  with  the  producer  than 
B  is,  while  B  is  in  nearer  communication  with  the  consumer. 
If  A  sold  to  B  and  B  sold-  back  to  A  again,  there  would 
have  been  two  sales  with  no  net  result.  So,  also,  if  the  wheat 
passed  from  A  to  C  through  the  hands  of  B,  when  C  could 
just  as  well  have  purchased  from  A,  B's  labor  would  be 
wasted.  Hence  when  all  transactions  are  conducted  in  the 
most  economical  manner  there  will  be  no  more  exchanges  than 
are  necessary  to  the  proper  care  of  the  wheat  while  it  is  passing 
from  the  farm  to  the  mill. 

But  there  is  one  occasional  exception  to  the  rule.  A  and  B 
may  have  different  opinions  on  the  subject  of  the  future  price 
of  wheat,  the  one  thinking  that  it  is  going  to  fall,  the  other 
that  it  is  going  to  rise.  Then  B  may  purchase  the  wheat,  not 
to  send  to  some  other  market,  but  to  keep  in  order  to  re-sell  it 
in  the  future  at  a  higher  price.  Perhaps  he  will  sell  it  back 


III.  20.]     THE  RELATION  OF  PRICE  AND  DEMAND.  225 

to  the  very  man  from  whom  lie  bought  it,  in  which  case  the 
latter  will  suffer  for  his  want  of  judgment.  This  operation  of 
selling  merely  to  take  advantage  of  a  prospective  rise  in  price 
is  called  speculation.  Its  economic  effects  are  greatly  exagger- 
ated in  the  popular  mind.  It  amounts  to  little  more  than 
betting  on  the  future  price  of  the  article  speculated  in. 

Prices  in  Different  Markets.  It  is  obvious  that  there  can- 
not be  two  prices  for  the  same  commodity  in  the  same  market 
at  the  same  time.  Tims  the  price  of  wheat  in  Chicago  is  tele- 
graphed over  the  country  from  day  to  day  with  as  much  exact- 
ness as  we  know  the  height  of  the  barometer.  The  same  is  true 
of  the  great  cotton  markets  in  Charleston  and  Liverpool,  and 
of  the  silver  market  in  London. 

It  is  also  evident  that  in  two  different  markets  the  price 
cannot  differ  by  more  than  the  cost  of  transportation  from  one 
market  to  another.  If  it  costs  fifteen  cents  to  transport  a 
bushel  of  wheat  from  Chicago  to  New  York,  it  is  certain  that 
the  price  in  New  York  cannot  differ  by  more  than  fifteen 
cents  from  that  in  Chicago.  For,  if  there  were  a  greater  dif- 
ference, dealers  would  purchase  in  the  other  market  and  trans- 
port it,  thus  saving  money.  If  the  demand  in  New  York  is 
such  that  it  is  necessary  to  transport  wheat  from  Chicago  to 
meet  it,  then  the  price  in  New  York  must  be  higher  than  that 
in  Chicago  by  the  cost  of  transportation. 

2O.  Is  the  rise  of  price  consequent  on  increase  of  demand 
temporary  or  permanent?  It  does  not  follow  that  because 
increased  demand  raises  the  price  the  rise  will  be  permanent. 
The  first  effect  of  such  a  change  will  be  that  the  wholesale 
dealers  will  try  to  purchase  more  of  the  commodity  and  pay 
higher  prices  to  the  producers.  If  there  is  any  prospect  that 
the  increased  demand  will  be  permanent,  production  will  be 
stimulated;  manufacturers  will  enlarge  their  facilities  and  em- 
ploy more  men,  and  new  factories  will  be  started.  As  the  ul- 
timate result  of  this,  one  or  the  other  of  two  opposite  effects 
may  follow.  We  have  shown  in  Book  II.  that  commodities 
15 


226  TUB  LAWS  OF  SUPPLY  AND  DEMAND.        [111.21. 

can  frequently  be  made  more  cheaply  on  a  large  scale.  If 
then  the  increased  demand  is  such  as  to  lead  to  more  economi- 
cal production,  the  ultimate  result  will  be  to  lower  the  price. 
For  example,  the  price  at  which  axes  and  hatchets  are  sold  is 
very  much  below  what  they  would  cost  if  very  few  people 
wanted  them. 

On  the  other  hand,  it  may  happen  that  an  article  cannot  be 
produced  on  a  large  scale  with  advantage  owing  to  the  limited 
supply  of  something  necessary  to  its  production.  A  rise  of 
price  due  to  increased  demand  may  then  be  permanent,  as  will 
be  shown  in  the  next  chapter. 

21.  The  Law  of  Value  applied  to  Money.  "When  money 
and  goods  are  exchanged  for  each  other  we  may  consider  the 
act  of  exchange  to  consist  in  the  buying  of  the  money  with 
the  goods,  and  the  latter  will  then  be  the  price  paid  for  the 
money.  In  this  case  increasing  the  supply  of  money  has  the  same 
effect  as  increasing  the  supply  of  a  commodity;  that  is,  the 
value  of  the  money  relative  to  the  goods  it  exchanges  for  falls. 
This  is  the  same  as  saying  that  a  larger  amount  of  money  will 
be  required  to  purchase  a  given  commodity  ;  that  is,  there  will 
be  a  rise  of  prices.  The  law  under  which  this  occurs  will  be 
fully  explained  hereafter.  At  present  we  need  only  state  the 
result,  which  is  :  If  the  volume  of  currency  J<?  increased,  all 
other  things  T>eing  equal,  money  will  le  cheaper  relatively  to 
goods,  and  thus  the  scale  of  prices  will  le  increased  in  the 
same  proportion. 


EXERCISES.  227 


ILLUSTRATIONS  AND  EXERCISES. 

1.  Mill  says  there  can  be  no  such  thing  as  a  general  rise  in  values.    Ex- 
plain this  generally,  and  especially  in  the  case  of  a  general  rise  of  prices, 
and  show  under  what  limitations  it  is  true. 

2.  Can  we  make  any  exact  comparison  of  the  value  of  a  barrel  of  flour 
among  the  Puritans  two  centuries  ago  with  its  value  at  the  present  time? 

3.  Show  the  different  results  when  the  value  of  an  article  rises  in  conse- 
quence of  its  scarcity,  and  when  in  consequence  of  some  new  use  being 
found  for  it. 

4.  During  the  Civil  War  the  prices  of  nearly  all  commodities  were  twice 
as  high  as  before.    During  the  ten  years  following  the  close  of  the  war 
there  was  a  gradual  diminution  of  all  prices,  so  that  the  owner  of  a  farm  in 
1875  might  find  it  worth  only  half  as  many  dollars  as  in  1864.     Do  you  con- 
ceive that  the  rise  of  values  in  the  one  case  and  the  diminution  in  the  other 
indicated  any  actual  change  in  the  national  wealth?    What  did  these  varia- 
tions indicate? 

5.  If  we  regard  value  as  purchasing  power,  explain  how  it  is  to  be  meas- 
ured.   Does  any  error  arise  from  this  view  of  value? 

6.  If  we  lived  in  a  country  where  all  the  food  and  clothing  we  wanted 
could  be  had  without  labor  and  without  price, — where  all  kinds  of  food 
ready  to  eat  grew  from  the  ground,  and  clothing  of  the  latest  fashion  grew 
upon  trees, — would  values  be  greater  or  less  than  they  are  now? 

7.  It  is  sometimes  said  that  exchange  increases  wealth  ;  that  is,  that  things 
are  more  valuable  after  they  have  exchanged  ownership  than  they  were 
before.     Under  what  limitations  is  this  true,  and  how  does  the  friction  of 
exchange  enable  us  to  define  the  increase?    Compare  the  value  of  a  pound 
of  sugar  in  the  barrel  at  a  grocer's  store  with  the  same  value  after  the  sugar 
has  been  sold  to  the  customer. 

8.  Can  you  apply  the  theory  of  value  so  as  to  lay  down  any  rule  to  govern 
the  education  and  training  of  youth  ?    If  there  is  one  kind  of  knowledge  and 
understanding  which  a  man  can  readily  acquire  whenever  he  wants  it,  and 
will  acquire  by  his  daily  experience,  and  another  kind  which  he  can  acquire 
only  when  under  the  discipline  of  the  school,  show  how  the  theory  of  value 
will  apply  to  the  question  what  the  school  should  teach. 

9.  Some  writers  have  claimed  that  prices  are  regulated  by  competition. 
If  we  grant  that  this  is  true,  does  it  give  us  a  satisfactory  scientific  theory 
of  the  subject? 

10.  In  our  markets  the  price  of  flour  and  corn-meal  are  generally  in  the 
ratio  3  :  2.     Explain  how  this  ratio  arises. 


228  THE  LAWS  OF  SUPPLY  AND  DEMAND. 

11.  "The  price  of  mutton  on  an  average  exceeds  that  of  beef  in  the  ratio 
of  9  to  8:  we  must  conclude  that  people  generally  esteem  mutton  more  than 
beef  in  this  proportion,  otherwise  they  would  not  buy  the  dearer  meat." 
Can  you  make  any  improvement  on  this  statement?    Do  the  respective 
quantities  of  mutton  and  beef  which  are  eaten  come  into  the  question? 

12.  In  London,  on  April  15,  1865,  copies  of  the  London  Times  containing 
the  news  of  President  Lincoln's  assassination  sold  at  the  price  of  sixly 
cents  or  upward.    Mr.  Shadwell  says  he  knows  of  no  cause  which  deter- 
mined the  price  to  be  exactly  sixty  cents.    What  can  correctly  be  said  on 
the  subject?    Is  there  any  reason  to  believe  that  the  price  of  sixty  cents  was 
at  any  moment  uniform  all  through  the  city,  or  that  it  continued  through  a 
period  of  several  hours?    What  do  you  suppose  was  the  actual  state  of  the 
case? 

13.  Arrange  the  following  articles  of  common  consumption  according  to 
what  you  suppose  to  be  their  respective  degrees  of  sensitiveness,  putting 
the  most  sensitive  at  the  top  of  the  list  and  the  least  sensitive  at  the  bot- 
tom: corn-meal;  coarse  rye  flour;  pork;  beef;  sugar;  molasses;  coarse 
clothing  for  laborers;   fine  clothing;  tobacco;  imported  wines;  writing- 
paper;  ink;  pepper;  magazines;  paintings;  government  bonds. 

Each  product  may  be  considered  sensitive  or  insensitive  according  to 
the  criterion  laid  down  in  §  15.  If  the  rise  in  price  causes  more  than  the 
corresponding  economy  of  consumption,  so  that  people  in  general  spend  less 
money  for  it  when  the  price  is  high,  the  commodity  is  sensitive.  In  the 
opposite  case  it  should  be  classed  as  insensitive.  If  the  consumption 
varies  inversely  as  the  price,  so  that  the  money  expended  for  a  commodity 
may  be  considered  to  remain  constant,  the  commodity  should  be  classified 
as  sensitive  in  an  average  degree. 

14.  Show  that  the  degree  of  sensitiveness  of  a  whole  class  of  commod- 
ities, one  of  which  may  be  substituted  for  another,  will  be  very  different 
from  that  of  each  of  the  commodities  considered  separately.     Consider, 
for  example,  the  various  kinds  of  meat — beef,  mutton,  veal,  etc.    If  we 
suppose  the  price  of  one  of  these  to  rise  while  the  price  of  all  the  others 
remains  constant,  we  should  find  for  each  one  taken  separately  a  certain 
degree  of  sensitiveness.    But  suppose  the  price  of  all  should  rise  in  the 
same  proportion ;  show  that  they  would  then  be  less  sensitive.    If  food  of 
every  kind  should  rise  in  the  same  proportion,  to  what  extent  would  it 
prove  sensitive? 

15.  If  statistics  show  that  in  the  city  of  Cincinnati  the  sales  of  flour 
had  increased  22  per  cent  from  one  year  to  the  next,  while  the  price  was 
10  per  cent  higher,  would  you  conclude  that  the  change  of  price  was  due 
to  a  change  in  the  demand  or  vice  versa  ?    What  would  you  reply  to  an 
objector  who  should  tell  you  that  this  fact  was  contrary  to  the  law  of  price 
and  demand  laid  down  in  §  14,  and  so  disproved  that  law? 


EXERCISES.  229 

State  the  criterion  for  determining  in  such  a  case  whether  it  is  the  price 
•which  changes  the  demand  or  the  demand  which  changes  the  price. 

16.  It  is  said  that  the  Dutch  possessors  of  certain  islands  in  the  East 
Indies,  where  the  whole  supply  of  certain  spices  was  raised,  were  in  the 
habit  of  ascertaining  every  year  the  total  crop.    If  they  found  it  to  exceed 
the  amount  they  could  sell,  every  one  was  required  to  burn  his  share  of  the 
excess  in  order  that  the  price  might  not  be  lowered  by  too  much  being 
thrown  in  the  market.    Were  they  the  gainers  by  this  operation?    On  what 
principle  would  the  gains  depend? 

17.  If  the  price  of  food  of  every  kind  should  rise  25  per  cent,  what  effect 
would  that  rise  have  upon  the  consumption  of  other  commodities,  and  what 
effect  upon  their  price? 

18.  Sugar  is  much  more  necessary  to  table  enjoyment  than  pepper.     Yet, 
should  the  price  of  both  rise  threefold,  people  would  economize  much  more 
on  the  sugar  than  on  the  pepper.    Explain  this.    Apply  the  explanation  to 
the  classification  of  commodities  in  the  order  of  necessity  on  the  following 
definition:  Assume  a  man's  income  to  diminish  progressively.    Then  things 
are  necessary  in  the  order  in  which  he  dispenses  with  them. 

19.  Show  that  insensitive  commodities  arc  those  whose  price  will  rise 
most  in  case  of  scarcity. 

20.  If  all  commodities  should  become  cheaper  in  the  same  proportion, 
of  which  class,  the  necessaries  or  the  luxuries  of  life,  would  the  consump- 
tion be  the  more  augmented? 

21.  "What  effect  would  a  general  failure  of  the  crops  all  over  the  world 
have  upon  the  price  of  fine  clothing? 

22.  If  such  a  failure  of  the  crops  were  foreseen  by  the  wholesale  deal- 
ers in  grain  six  months  before  it  occurred,  but  remained  unknown  to  the 
general  public,  in  what  way  would  the  public  be  led  to  economize  in  the 
consumption  of  their  existing  supply  of  grain? 

23.  When  our  government  issued  a  large  volume  of  greenbacks  in  1862, 
gold  began  to  be  at  a  premium  in  New  York.    Many  people  attributed 
this  state  of  things  to  the  gold  -  dealers  of  Wall  Street.    Have  you  any 
opinion  on  the  subject?    What  effect  had  the  issue  and  the  war  together 
upon  the  prices  of  commodities  in  general?    Could  the  changes  in  the 
prices  of  commodities  affect  the  premium  on  gold,  and  if  so,  how? 

24.  If  railways  were  abolished,  what  would  be  the  effect  upon  manu- 
factures in  Iowa,  and  upon  agriculture  in  New  England? 


230  THE  LAWS  OF  SUPPLY  AND  DEMAND.        [111.22. 


CHAPTER  IY. 

MONOPOLIZED   REQUISITES    OF   PRODUCTION. 

22.  IN  the  preceding  chapter  we  were  mainly  concerned 
with  the  mutual  relations  of  price  and  demand.  The  next 
subject  in  logical  order  is  the  effect  of  a  change  in  the  demand 
for  a  commodity,  or  its  price,  upon  the  supply.  From  the 
popular  point  of  view,  which  was  to  a  certain  extent  the  view 
of  the  earlier  economists,  the  law  is  very  simple.  When  the 
price  of  a  commodity  rises,  more  people  will  engage  in  its  pro- 
duction, until  by  their  mutual  competition  the  price  is  brought 
to  the  lowest  paying  point.  If  skill  is  required  in  the  work, 
then  the  producer  of  that  skill  must  be  paid  for  the  labor  which 
he  spent  in  acquiring  it.  If  the  compensation  is  more  than  suffi- 
cient to  pay  for  the  labor,  it  will  stimulate  men  to  acquire  the 
skill.  Thus  the  gains  of  a  physician  form  the  compensation 
not  only  for  his  current  work,  but  for  the  time  and  money 
which  he  spent  in  learning  his  profession.  It  is  thus  conceived 
that  the  price  of  a  commodity  can  be  ultimately  expressed  in 
terms  of  human  labor,  provided  we  include  not  only  the  labor 
spent  directly  in  production,  but  in  collecting  all  the  requisites 
of  production,  whether  capital,  skill,  or  knowledge. 

There  was  one  obvious  exception  to  this.  The  production 
of  breadstuffs  and  other  means  of  subsistence  required  land, 
and  it  was  clear  that  the  price  of  land  did  not  admit  of  being 
measured  by  human  labor,  since  it  was  not  the  product  of  labor. 
Thus  rent  became  an  important  factor  in  the  price.  Kent  was 
defined  by  Adam  Smith  as  the  income  received  by  the  owner 
for  the  original  indestructible  powers  of  the  soil. 

It  was  next  seen  that  production  could  not  be  increased 
indefinitely  by  the  mere  increase  of  human  labor,  but  that  in 
many  cases  every  additional  unit  of  quantity  produced  required 


III.  23.]  MONOPOLIZED  REQUISITES  OF  PRODUCTION.        231 

more  labor  than  the  preceding  unit.  For  example,  suppose  that 
from  a  given  farm  1000  bushels  of  wheat  can  be  produced  at  a 
certain  cost  in  labor,  fertilizers,  management,  etc.  It  is  possi- 
ble that  by  doubling  the  cost,  that  is,  the  labor  and  material 
devoted  to  the  farm,  2000  bushels  could  be  raised.  If  with 
every  addition  of  this  amount  of  labor  1000  additional  bushels 
of  wheat  could  be  raised  from  the  farm,  it  is  evident  that  there 
would  be  no  limitation  upon  the  amount.  But  as  a  matter  of 
fact  we  know  very  well  that  this  is  not  the  case,  and  that  after 
a  certain  point  every  additional  bushel  will  cost  more  and  more 
labor,  and  that  practically  no  amount  of  additional  expense  will 
increase  the  product  beyond  a  certain  maximum. 

We  must  now  recognize  the  fact  that  at  the  present  time  all 
the  requisites  of  production  are  not  equally  at  the  command  of 
every  one,  but  that  in  a  great  number  of  cases  their  possession 
is  limited  to  such  an  extent  that  no  sufficient  approximation 
to  the  truth  can  be  gained  by  assuming  that  production  can 
bo  measured  in  labor  alone.  We  need  a  word  to  express 
the  possession  of  requisites  for  production  which  are  not  at  the 
command  of  men  in  general,  and  the  word  which  best  expresses 
this  is  monopoly.  The  use  of  this  word  is  indeed  subject  to 
the  great  objection  that  it  is  used  in  ordinary  language  as  a 
term  of  reproach.  Were  this  idea  necessarily  associated  with 
it,  economists  should  find  another.  But  it  should  be  a  part  of 
the  training  of  the  scientific  student  to  eliminate  all  ideas 
of  praise  and  blame  from  the  terms  which  he  uses,  and  to  re- 
member that  science  deals  only  with  things  and  facts  as  they 
are.  Hence  when  we  use  the  word  "  monopoly  "  we  attach  no 
reproach  to  the  idea  conveyed,  but  simply  use  the  word  to 
designate  a  certain  state  of  things. 

23.  How  the  Monopoly  Element  comes  into  the  Question. 
Suppose  a  great  increase  in  the  demand  for  a  commodity  C. 
We  may  suppose,  to  fix  the  ideas,  that  while  a  year  or  two  ago 
a  quantity  of  C  represented  by  1000  units  could  be  sold  annually 
at  a  price  of  $1  per  unit,  the  same  amount  can  now  be  sold  at 


232  TUB  LAWS  OF  SUPPLY  AND  DEMAND.        [III.  24. 

$3  per  unit,  or  that  3000  can  be  sold  at  $1  per  unit.  It  is  then 
clear  that  the  result  must  lie  somewhere  between  two  extremes. 

The  first  extreme  case  is  that  in  which  all  the  elements  nec- 
essary for  the  production  of  C  are  at  the  command  of  everybody, 
or  at  least  of  as  many  people  as  are  necessary  to  supply  the  in- 
creased demand  of  3000  units.  The  result  of  this  wiU  be  that 
a  slight  increase  in  the  price  of  C  will  stimulate  those  already 
engaged  in  producing  it  to  enlarge  their  facilities,  and  will 
draw  other  people  into  the  work.  This  increase  of  production 
will  continue  until  the  amount  produced  is  trebled.  As  pro- 
duction has  kept  pace  with  demand,  the  selling  price  will  be  the 
same  as  before,  or  at  least  not  materially  higher. 

But  suppose,  as  the  other  extreme  case,  that  some  element 
necessary  to  the  production  of  C  cannot  be  commanded  by  the 
world  at  large.  Perhaps  there  is  a  man  X  who  alone  possesses 
the  knowledge  and  skill  to  make  C  at  a  less  cost  than  $3  per 
unit,  or  who  has  a  patent  on  something  which  is  a  necessary 
component  of  C,  or  there  is  a  company  Y  which  owns  a  mine 
out  of  which  the  raw  material  for  making  C  can  alone  be  got. 
It  is  then  clear  that  there  will  not  necessarily  be  any  increase  of 
production,  but  that,  instead  of  3000  units  of  C  being  sold  at 
$1  per  unit,  there  may  be  only  1000  as  before,  with  the  sell- 
ing price  raised  from  $1  to  $3  in  consequence  of  the  increase 
of  demand. 

The  word  which  expresses  this  exclusive  command  by  X  or 
y  may  now  be  defined  as  follows : 

A  monopoly  is  the  ownership  or  command,  by  one  or  a 
limited  number  of  persons,  of  some  requisite  of  production 
which  is  not  solely  a  product  of  human  labor. 

24.  A  little  consideration  will  make  known  to  us  three 
classes  of  monopolies. 

Firstly,  the  exclusive  command  of  every  man  over  the  facul- 
ulties  with  which  the  Creator  has  endowed  him  constitutes  a 
monopoly.  If  a  man  is  born  with  an  unusual  share  of  admin- 
istrative or  business  ability  which  enables  him  to  organize  and 


III.  24.]  MONOPOLIZED  REQUISITES  OF  PRODUCTION.        233 

direct  the  productive  labor  of  thousands  of  other  men  in  the 
most  effective  and  economical  way ;  if  he  is  born  with  any 
special  talent,  or  with  unusual  skill  in  any  branch  of  produc- 
tion, then  he  has  the  monopoly  of  a  valuable  requisite  of  pro- 
duction which  his  fellow-men  cannot  take  from  him.  This 
monopoly  is  not  only  a  rightful  one,  but  the  principle  on 
which  it  rests  is  at  the  basis  of  all  our  ideas  of  human  rights. 

The  second  great  class  of  monopolies  consists  in  the  private 
ownership  of  natural  requisites  of  production.  As  already 
shown,  the  laws  of  all  civilized  nations  recognize,  establish,  and 
protect  this  ownership.  Such  natural  requisites  are  land,  and 
the  coal,  iron,  and  other  minerals  which  are  beneath  it.  Although 
the  value  of  land  depends  largely  on  human  labor,  yet  the  land 
itself,  the  acres  on  the  surface  of  the  earth,  are  entirely  the  gift 
of  nature.  The  iron,  copper,  silver,  tin,  and  other  ores  be- 
neath the  surface  of  the  earth  are  also  entirely  the  gift  of 
nature.  Although  labor  is  required  to  give  them  value,  yet 
every  one  is  not  at  liberty  to  apply  this  labor ;  the  right  to  do 
this  being  absolutely  confined  to  the  owners.  The  question  of 
the  rightfulness  and  expediency  of  this  class  of  monopolies 
may  be  regarded  in  some  of  its  points  as  an  open  one,  but  its 
discussion  does  not  belong  to  the  purely  scientific  treatment  of 
the  subject. 

The  third  class  of  monopolies  consists  of  those  which  are 
granted  by  governments,  such  as  the  exclusive  right  to  build 
a  railway  or  dig  a  canal  over  particular  regions,  to  make  a  pat- 
ented article,  or  to  publish  a  copyrighted  book.  Patents  and 
copyrights  are  in  a  certain  degree  a  mere  extension  of  the  first 
class  of  monopolies,  since  their  object  is  to  guarantee  to  inven- 
tors and  authors  the  benefit  of  any  superior  skill  with  which 
nature  may  have  endowed  them. 

It  may  seem  that  patents  and  copyrights  do  not  strictly  come 
within  our  definitions  of  monopolies,  since  what  is  monopolized 
cannot  be  called  a  requisite  of  production  limited  in  supply. 
It  is  perfectly  true  that  they  are  not  material  requisites  of  pro- 
duction. But  we  have  shown  that  knowledge,  which  is  imma- 


234  THE  LAWS  OF  SUPPLY  AND  DEMAND.        [III.  25. 

terial,  is  a  very  important  requisite,  and  what  is  granted  to  the 
patentee  or  author  is  the  benefit  of  a  certain  knowledge  which 
he  has  himself  acquired.  The  man  who  can  write  a  very  in- 
teresting and  popular  novel  has  been  endowed  by  nature  with 
a  peculiar  skill  which  he  can  use  to  increase  the  pleasure  of  his 
fellow-men.  It  is  perfectly  right  that  he  should  gain  whatever 
compensation  he  can  by  the  use  of  this  special  skill.  But  when 
he  writes  his  story  everybody  can  copy  it  and  spread  it,  unless 
forbidden  to  do  so.  Thus  in  order  to  secure  the  author's  right 
to  the  product  of  his  skill  and  labor  it  is  necessary  that  gov- 
ernment shall  prohibit  the  multiplication  by  printing  of  copy- 
right stories,  except  with  the  author's  consent.  In  form  the 
monopoly  is  that  of  printing  certain  combinations  of  words  in 
a  book,  and  we  may  consider  the  monopoly  to  consist  in  the 
exclusive  right  to  use  these  printed  words.  From  this  point 
of  view  the  object  in  which  the  wealth  inheres  would  not  be  the 
work  of  nature.  But  the  author's  faculties  are  originally  the 
work  of  nature,  and  it  is  this  which  we  should  regard  as  really 
protected  by  the  copyright  laws.  These  same  remarks  apply 
to  patented  machines  with  so  few  modifications  that  the  reader 
can  make  them  for  himself. 

25.  Limitations  upon  the  Definition  of  the  Word  Monop- 
oly. The  essential  feature  of  the  monopoly  element  in  produc- 
tion, which  gives  it  its  economic  importance,  consists  in  this,  that 
the  possessors  of  monopolies  may  have  to  a  greater  or  less  extent 
an  advantage  over  their  less  favored  fellows  in  the  price  which 
they  can  command  for  the  use  of  the  special  agencies  monopo- 
lized. This  advantage  must  be  not  merely  a  temporary  one, 
but  such  as  to  entirely  prevent  competition  on  equal  terms  be- 
tween the  less  and  the  more  favored  classes  in  the  use  of  the 
monopolized  agency.  In  order  that  the  definition  may  include 
nothing  but  what  is  essential  to  this  advantage,  certain  limita- 
tions have  to  be  placed  upon  it. 

First  Limitation.  A  monopoly  is  of  no  value  or  account 
unless  the  number  of  persons  who  possess  it  is  so  small  com- 


III.  25. J  MONOPOLIZED  REQUISITES  OF  PRODUCTION.       235 

pared  with  the  quantity  of  the  monopolized  article  which  the 
public  demand  that  these  persons  can  command  a  higher  price 
for  the  article  than  if  there  were  no  monopoly.  For  example, 
in  the  widest  sense,  we  may  say  that  John  Smith  has  the  com- 
plete and  exclusive  monopoly  of  his  own  hands.  But  if  his 
hands  are  no  better  than  those  of  other  people,  this  monopoly 
gives  him  no  advantage  over  them,  because  they  can  do  what- 
ever lie  can.  Again,  the  shoemaker  has  the  monopoly  of  his 
own  skill;  and  it  may  be  that  not  one  man  out  of  fifty  in  the 
community  has  the  natural  aptitude  which  would  enable  him 
to  become  a  good  shoemaker.  But  if  this  fraction  of  the  pop- 
ulation has  the  aptitude,  and  can  make  all  the  shoes  the  com- 
munity demands,  the  monopoly  is  of  no  value.  We  must  there- 
fore distinguish  between  effective  monopolies,  which  give  their 
possessors  an  advantage  in  production,  and  ineffective  monop- 
olies, which  give  no  such  advantage,  either  because  there  is  not 
sufficient  demand  for  the  monopolized  requisite,  or  because 
too  many  people  share  the  monopoly.  Hereafter  whenever  we 
use  the  word  monopoly  we  shall  be  understood  to  mean  an 
effective  monopoly. 

Second  Limitation.  It  must  be  understood  that  the  applica- 
tion of  the  word  monopoly  is  limited  to  such  requisites  of 
production  as  are  not  the  sole  products  of  the  labor  of  the 
person  owning  them.  Now,  a  number  of  elements  enter  into 
every  production.  When,  therefore,  we  inquire  how  far  a 
requisite  of  production  is  monopolized,  we  must  analyze  it  into 
its  original  elements  until  we  find  where  the  natural  agency 
comes  in.  For  example,  the  skill  of  the  shoemaker  may  be 
entirely  a  product  of  time  and  labor  spent  in  acquiring  it.  But 
in  order  to  effectively  expend  that  time  and  labor  he  must  have 
possessed  in  the  beginning  the  industry  and  perseverance  to 
enable  him  to  learn  his  trade.  This  industry  and  perseverance 
may  be  in  part  acquired  qualities,  and  therefore  not  monopo- 
lies ;  but  in  so  far  ao  the  man  did  not  acquire  them  they  are 
monopolies.  In  order  to  acquire  them  he  must  have  had  some 
good  qualities  born  in  him,  and  his  parents  must  have  taken 


23C  THE  LAWS  OF  SUPPLY  AND  DEMAND.        [III.  25. 

Borne  pains  in  promoting  these  qualities.  Now,  since  the  man 
did  not  make  himself  nor  guide  his  parents  in  his  early  educa- 
tion, it  is  to  these  native  and  early  acquired  habits  that  we  are 
to  look  for  the  monopolized  elements  in  his  nature. 

So  also  with  regard  to  any  finished  product.  "We  cannot 
generally  say  of  the  product  as  a  whole  that  it  is  or  is  not  mo- 
nopolized. What  we  must  do  is  to  trace  its  production  back 
to  its  beginning,  and  see  what  monopolized  elements  in  the 
shape  of  patent-rights,  land,  ores,  or  other  natural  products 
were  necessary  elements  in  its  existence. 

Third  Limitation.  Monopolies  are  not  in  general  abso- 
lute, but  the  advantages  which  they  give  vary  in  degree.  As 
a  general  rule  a  monopolized  requisite  is  not  one  which  the 
owners  of  the  monopoly  alone  can  supply  on  any  terms  what- 
ever, but  it  is  one  which  they  can  supply  with  less  labor  to 
themselves  than  other  people  can.  To  return  to  our  former 
example :  even  if  one  or  a  few  men,  owing  to  their  superior 
skill,  should  monopolize  all  the  shoemaking  of  a  community, 
it  may  nevertheless  be  the  case  that  other  people  could,  on  a 
pinch,  make  shoes.  Again,  the  ownership  of  land  is  very  valua- 
ble near  a  city,  and  continually  diminishes  as  we  go  away  from 
population.  If  the  owners  near  the  city  charge  too  high  for 
their  products,  people  can  fall  back  on  the  more  distant  land. 
Some  deposits  of  iron  ore  may  be  so  rich  in  metal  and  so  near 
the  surface  that  iron  can  be  made  from  them  at  six  dollars  per 
ton ;  from  other  deposits  it  might  cost  twelve  dollars  a  ton,  and 
from  yet  others  twenty,  fifty,  or  a  hundred.  The  values  of  these 
monopolies  therefore  differ  in  degree,  and  no  one  of  them  be- 
comes effective  until  it  will  pay  to  utilize  the  ore. 

Since,  in  these  cases,  a  monopoly  only  means  facilities  supe- 
rior to  those  enjoyed  by  other  men,  there  is  implied  in  it  a  term 
of  comparison  comprising  men  in  general.  Then  when  we 
say  that  this  man  X  possesses  talents,  skill,  or  a  natural  agent 
superior  to  those  enjoyed  by  men  in  general,  the  question  may 
arise  what  we  are  to  understand  by  this  last  term.  There  are 
so  many  gradations  among  men  that  we  can  set  up  no  exact 


III.  26.]  MONOPOLIZED  REQUISITES  OF  PRODUCTION.        237 

standard  as  that  of  men  in  general.  The  question  cannot  be 
answered  in  a  way  which  shall  be  mathematically  exact.  "We 
can  only  say  that  the  proper  term  of  comparison  is  the  class  of 
men  having  the  same  general  talents,  education,  possessions,  or 
powers  of  production  in  the  community  at  large.  Since  this 
implies  a  series  of  gradually  increasing  monopolies,  we  may 
call  them  relative  or  graduated  monopolies. 

An  absolute  monopoly  will  then  mean  one  possessed  only 
by  one  or  a  limited  number  of  persons. 

26.  Temporary  Monopolies.  If  an  individual  or  a  company 
has  a  great  capital  invested  in  a  manufacturing  establishment, 
although  there  may  be  no  actual  monopoly,  yet  for  the  time 
being  the  situation  will  be  the  same  in  its  relation  to  varying 
demand  as  if  the  skill  and  capital  invested  in  the  establish- 
ment were  monopolized.  An  increasing  demand,  especially  if  it 
is  believed  to  be  temporary,  cannot  be  at  once  met  by  other 
men  founding  similar  factories,  because  this  requires  time, 
while  the  product  is  wanted  now.  But  if  demand  falls  off, 
the  establishment  cannot  advantageously  devote  its  capital  and 
its  organization  to  any  other  industry  than  that  in  which  it  is 
engaged.  Cotton-making  machinery  can  make  nothing  but 
cotton,  and  the  operatives  of  the  factory  are  not  readily  availa- 
ble for  other  employments.  The  result  is  that  the  owners  of 
the  factory  may  be  obliged  to  go  for  a  considerable  period 
without  gaining  either  profits  on  their  investments  or  compen- 
sations for  their  peculiar  skill. 

In  this  connection  we  must  always  remember  that  the  econo- 
mic effect  of  a  monopoly  does  not  arise  merely  from  its  prevent- 
ing competition  on  equal  terms,  but  that  it  also  implies  that  the 
owner  of  the  monopolized  product  cannot  change  his  occupation 
without  a  relative  disadvantage.  For  example,  a  lawyer  who 
lias  rare  natural  gifts  for  his  profession  cannot  advantageously 
change  that  profession  merely  because  he  finds  the  demand  for 
his  services  falling  off.  The  chances  are  that  in  any  other  pro- 
fession he  can  do  no  better  than  the  common  run  of  mankind. 


238  TUE  LAWS  OF  SUPPLY  AND  DEMAND.        [III.  28. 

Thus  the  conclusion  that  the  supply  of  a  monopolized  element 
cannot  be  readily  increased  to  meet  an  increasing  demand  im- 
plies that  it  cannot  readily  be  diminished  to  meet  a  diminish- 
ing demand.  This  is  as  true  of  a  temporary  monopoly  as  of 
any  other  one. 

27.  Recapitulation.     The   preceding  definitions   may   be 
summed  up  as  follows : 

I.  When  one  or  a  limited  number  of  persons  command  the 
supply  of  any  natural  requisite  of  production  their  power  is 
called  a  monopoly. 

II.  Monopolies  inhere,  not  in  manufactured  products,  but  in 
the  original  elements  or  requisites  which  are  necessary  to  the 
existence  of  the  product. 

III.  A  monopoly  is  ineffective  if  the  number  of  holders  is 
so  great  and  the  demand  for  the  requisite  so  small  that  the 
holders  can  command  no  higher  price  for  the  requisite  monopo- 
lized than  will  pay  them  for  the  labor  and  capital  which  they 
expend  in  supplying  it.     It  is  effective  when  the  demand  be- 
comes so  great  or  the  supply  so  small  that  the  monopolized 
requisite  commands  a  higher  price  than  this. 

IY.  A  monopoly  is  complete  or  absolute  if  no  others  than 
one  or  a  limited  number  of  possessors  can  supply  the  requisite. 
It  is  relative  or  graduated  when  it  comprises  only  superior 
facilities  for  supplying  the  requisite,  so  that  the  latter  can  be 
obtained  from  an  unlimited  number  of  sources  by  increasing 
the  labor  and  capital  devoted  to  obtaining  it. 

V.  A  temporary  monopoly  may  inhere  in  a  manufactured 
product  through  a  sudden  increase  of  demand,  or  through  all 
the  manufacturers  combining  to  limit  production  and  keep  up 
price. 

28.  Effect  of  Monopolies  upon  the  Relation  between  Price 
and  Supply.     "We  have  seen  that  when  the  demand  for  a  com- 
modity increases  in  such  wise  that  more  of  it  is  wanted  and,  in 
consequence,  people  are  willing  to  give  a  higher  price  for  it, 


III.  29.]  MONOPOLIZED  REQUISITES  OF  PRODUCTION.        339 

one  of  two  things  will  occur.  Its  producers  must  either  make 
a  greater  quantity  of  the  commodity  in  order  to  supply  the 
increased  demand,  or  they  can  and  will  charge  a  higher  price 
without  increasing  the  quantity.  Thus  the  supply  and  demand 
can  be  equalized  in  either  of  two  ways  by  a  proper  adjustment 
of  the  price.  Both  adjustments  will  commonly  come  into  play; 
that  is,  a  larger  quantity  will  be  produced,  but  not  a  quantity 
so  much  larger  that  it  will  all  be  demanded  at  the  old  price. 
The  production  will  be  increased  and  the  price  raised  at  the 
same  time. 

Let  us  return  to  the  illustration  of  §  22.    "We  there  supposed 
that  1000  units  of  a  product  C  were  sold  annually  in  a  certain 
condition  of  demand  at  the  price  of  $1  per  unit.     When  the 
demand  is  increased  threefold  the  extreme  results  would  be : 
1000  units  produced  as  before,  but  sold  at  $3  per  unit. 
3000  units  produced  and  sold  at  the  old  price  of  $1. 

If,  as  a  result  of  the  increased  demand,  3000  units  were 
produced,  corresponding  to  the  increase,  it  would  show  that 
there  was  no  effective  monopoly.  If  only  1000  units  were  pro- 
duced, it  would  show  that  the  monopoly  was  absolute.  The 
average  result  might  be  that  2000  units  would  be  produced, 
and  would  be  sold  at  perhaps  $1.50  per  unit,  or  at  least  at  some 
price  exceeding  $1. 

The  state  of  equilibrium  is  reached  when  the  price  is  so  ad- 
justed that  the  quantity  produced  and  brought  to  market  is  all 
that  can  be  sold  at  that  price,  and  all  that  the  producers  are 
willing  to  make  at  that  price. 

29.  The  important  distinguishing  effect  of  a  monopoly  is 
that  it  prevents  the  supply  of  the  commodity  in  which  it  in- 
heres from  varying  in  response  to  variations  in  the  demand. 
The  question  what  kind  of  monopolies  enter  into  a  manufac- 
tured product,  and  to  what  extent  they  enter,  can  be  best 
answered  by  investigating  the  effect  of  an  increased  demand 
for  that  product. 

If  the  conditions  of  production  are  such  that  any  increase  of 


240  TBE  LAW  OF  SUPPLY  AND  DEMAND.          [III.  29. 

demand  will  be  met  by  a  corresponding  increase  of  production 
without  raising  the  price,  then  there  is  no  monopoly.  If,  owing 
to  the  necessity  of  requiring  skill  or  capital,  a  considerable 
period,  say  a  year  or  more,  is  required  to  increase  the  produc- 
tion, then  there  may  be  a  temporary  monopoly.  If,  however, 
the  price  comes  down  to  its  former  limit  when  a  reasonable 
time  has  been  given  for  increasing  production,  the  monopoly 
is  only  temporary.  If  it  will  never  come  down,  then  the  mo- 
nopoly impermanent  and  real. 

If  the  same  party  or  parties  must  supply  the  market,  no 
matter  how  much  the  demand  may  be  increased,  the  monopoly 
is  absolute.  If  the  increased  demand  and  higher  prices  result 
in  a  limited  competition,  the  monopoly  is  relative. 

Moreover,  in  every  case,  to  find  in  what  particular  requisite 
the  monopoly  inheres,  we  must  seek  out  those  requisites  the 
supply  of  which  cannot  be  indefinitely  increased  without  in- 
creasing the  cost.  These  will  be  the  monopolized  requisites. 

EXERCISES. 

1.  Consider  the  various  requisites  for  the  production  of  a  pair  of  shoes, 
and  describe  to  what  extent  they  arc  each  monopolized,  whether  the  monop- 
oly is  effective,  and,  if  so,  what  effect  it  has  on  the  variations  of  price  arising 
from  variations  in  demand. 

2.  Show  that  a  requisite  of  production  which  requires  longyears  of  study 
for  its  perfection  will  have  to  a  certain  extent  the  character  of  a  temporary 
monopoly,  although  it  may  be  within  the  reach  of  every  one  who  devotes 
the  necessary  time  to  the  study. 

3.  "Would  it  be  correct  to  say  that  society  is  any  worse  off  on  account  of 
natural  monopolies  of  any  kind  ?    For  example,  is  it  bad  for  society  that 
there  are  a  few  physicians  or  surgeons  of  such  extraordinary  skill  that  they 
can  command  fees  to  the  amount  of  a  hundred  dollars  in  a  day  ? 

4.  Enumerate  the  principal  monopolies  of  the  first  class  described  in 
§  24,  and  show  under  what  circumstances  and  to  what  extent  they  are 
effective. 

5.  Under  what  circumstances  will  the  owner  of  a  waterfall  be  in  posses- 
sion of  an  effective  monopoly  ? 

6.  Show  to  what  extent  and  in  what  way  the  ownership  of  iron  ore  in 
various  parts  of  the  country  constitutes  graduated  monopolies  ;  that  is, 
under  what  circumstances  these  monopolies  are  of  the  highest  value  to  their 
owners,  and  under  what  circumstances  they  are  of  no  value  at  all. 


III.  30.]  THE  RENT  OF  LAND.  241 


CHAPTER  Y. 

THE   RENT   OF   LAND. 

3O.  THE  ownership  of  land  comes  within  the  definition  of  a 
monopoly,  as  given  in  the  preceding  chapter.  For  land,  that 
is,  the  acres  on  the  earth's  surface,  is  a  product  of  nature  and 
not  of  human  skill.  It  is  also  a  product  limited  in  supply;  or, 
at  least,  that  portion  from  which  any  given  collection  of  peo- 
ple can  conveniently  draw  their  subsistence  is  limited.  This 
will  be  made  clear  by  reflecting  that  no  person  can  go  out  and 
fertilize  and  cultivate  land  at  pleasure,  because  he  will  find 
that  all  the  land  within  reach  is  already  occupied  by  somebody 
else,  and  is  owned  by  that  other  person  as  private  property. 
But  it  does  not  follow  from  this  that  the  monopoly  is  either 
an  unlimited  or  an  effective  one,  as  we  have  defined  these 
terms.  We  must  therefore  look  more  closely  into  the  matter 
with  a  view  of  seeing  how  far  the  usefulness  of  the  soil  is  to 
be  regarded  as  the  product  of  human  labor,  and  how  far  as 
the  gift  of  nature.  There  are  economists  who  have  claimed 
that  land  has  no  other  value  than  that  which  has  been  derived 
from  labor  expended  upon  it  by  its  owners,  and  is  therefore 
not  a  monopoly  at  all.  The  general  opinion  of  economists 
is,  however,  on  the  other  side.  The  theory  generally  in  vogue, 
and  which  we  are  about  to  develop,  is  commonly  associated 
with  the  name  of  Ricardo,  who  first  brought  it  to  public 
attention  in  a  clear  and  forcible  way.  In  explaining  it  we 
shall  closely  follow  F.  A.  Walker,  who  has  developed  it  with 
great  clearness  and  fulness.* 

We  begin  by  stating  a  fact  which  favors  the  view  of  the 
dissentients.  We  all  know  that  land  depends  very  largely  for 

*  In  his  little  book,  Land  and  its  Rent  (Boston,  1883). 
16 


242  THE  LAWS  OF  SUPPLY  AND  DEMAND.        [III.  81. 

its  fertility  upon  human  labor.  Before  a  crop  can  be  raised 
the  trees  must  be  cleared  away,  the  stumps  pulled  out  and 
burned,  and  the  ground  cleared  of  the  roots.  Even  irt  the 
case  of  the  great  prairies,  where  there  are  no  trees  to  clear 
away,  it  is  generally  necessary  to  dig  drains  and  to  clear  off 
the  crass  before  the  land  can  be  cultivated.  Then  labor  is  to 

O 

be  applied  to  plough  the  land  and  sow  the  seed.  Now  suppose 
that  one  man  working  in  this  way  upon  a  little  farm  of  twenty 
acres  could  raise  two  hundred  bushels  of  wheat.  It  will  be 
found  in  many,  perhaps  most  countries,  that  if  two  men  work 
and  put  in  twice  as  much  material  in  the  shape  of  fertilizers, 
plough  twice  as  well,  and  so  on,  fully  twice  the  crop  can  be 
raised  off  the  farm.  Possibly  they  might  raise  four  hundred 
and  fifty  bushels  by  their  combined  efforts,  and  thus  have 
twenty-five  bushels  each  more  than  if  they  had  worked  alone 
on  two  separate  farms  of  the  same  size.  Perhaps  if  three  men 
put  their  labor  and  fertilizers  into  the  same  farm,  they  would 
raise  three  times  as  much  as  one  man.  Now  if  this  scale  went 
on  indefinitely — that  is,  if  by  increased  labor  and  expense  in 
fertilizing  land,  a  proportional  increase  of  crop  could  always 
be  obtained — there  could  be  no  effective  monopoly  in  land. 
Every  man  who  wanted  wheat  could  get  as  much  by  joining 
hands  with  his  neighbor  and  helping  him  to  cultivate  his  farm 
as  he  could  by  getting  a  farm  of  his  own. 

But  such  is  not  the  case.  A  point  is  soon  reached  in  which 
an  addition  to  the  amount  of  labor  and  material  expended  on 
the  farm  will  not  give  a  corresponding  addition  to  the  crop. 
This  point  is  called  the  point  of  diminishing  returns.  We 
may  consider  it  as  reached  in  every  community  and  on  every 
farm  after  a  short  period  of  cultivation.  That  is,  the  more 
wheat  we  want  from  a  given  farm,  the  greater  the  labor  and 
capital  required  per  bushel. 

31.  Let  us  now  suppose  that,  within  convenient  reach  of  a 
city  or  any  other  market,  there  are  four  tracts  of  land  having 
four  different  degrees  of  fertility.  The  first  tract,  with  a  given 


III.  81.]  THE  EENT  OF  LAND.  243 

amount  of  labor  and  capital,  will  yield  twenty-four  bushels  of 
wheat  to  the  acre,  the  second  twenty-two  bushels,  the  third 
twenty  bushels,  the  fourth  eighteen  bushels.  Let  us  begin 
with  the  case  in  which  the  city  is  so  small,  or  the  market  one 
where  there  is  so  little  demand  for  wheat,  that  it  will  only  pay 
to  cultivate  part  of  the  twenty-four-bushel  tract.  Then  it  is 
evident  that  the  other  tracts  can  command  no  rent. 

Suppose  a  new  man  to  come  into  the  country  seeking  for 
land  to  cultivate.  Since,  by  hypothesis,  a  portion  of  the 
twenty-four-bushel  tract  is  still  uncultivated,  it  will  pay  the 
owners  of  that  tract  better  to  let  the  new-comer  have  a  farm 
upon  it  at  a  rental  of  one  bushel  per  acre  per  annum  than 
to  leave  it  wholly  uncultivated.  He  can  pay  this  rent  and  still 
have  twenty-three  bushels  per  annum  as  his  portion  of  the 
crop.  This  course  will  pay  him  better  than  it  would  to  culti- 
vate the  next  poorer  tract  free  of  rent,  because  then  he  would 
only  get  twenty-two  bushels,  and  he  will  of  course  choose  it. 
If  the  point  of  diminishing  returns  has  not  been  reached,  it 
might  even  pay  all  concerned  still  better  to  employ  the  new 
man,  with  his  capital,  as  an  assistant  in  improving  the  cultiva- 
tion of  the  already-cultivated  farms  than  to  rent  him  a  new 
one.  Hence  all  the  twenty-four-bushel  farms  will  not  be 
under  cultivation  until  the  point  of  diminishing  returns  has 
been  reached. 

Suppose  that  all  the  farms  of  the  twenty-four-bushel  class 
are  at  length  under  cultivation,  and  that,  owing  to  increased 
population  or  increasing  demand,  there  is  now  more  wheat 
wanted  than  can  be  raised  from  these  farms  under  the  existing 
system  of  farming.  Supposing  that  no  wheat  is  imported,  this 
demand  must  be  supplied  by  commencing  the  cultivation  of 
the  next  lower  grades  of  land,  namely,  those  in  the  twenty-two- 
bushel  tract.  Now,  by  hypothesis,  the  same  amount  of  labor 
and  capital  necessary  to  produce  twenty-two  bushels  from  this 
second  tract  will  produce  twenty-four  bushels  from  an  acre  of 
the  first  tract.  It  will  therefore  pay  a  tenant  as  well  to  rent  a 
farm  from  the  first  tract  at  two  bushels  per  acre  per  annum  as 


244  TUE  LAWS  OF  SUPPLY  AND  DEMAND.        [III.  32. 

to  have  land  in  the  second  tract  for  nothing.  Hence,  at  this 
point,  the  land  of  the  first  tract  will  yield  a  rental  of  at  least 
two  bushels  per  acre. 

Suppose  that  by  the  still  increasing  demand  the  lands  of 
the  twenty-bushel  and  eighteen-bushel  tract  come  into  cultiva- 
tion. Then,  reasoning  in  the  same  way,  the  twenty-bushel 
tract  will  yield  a  rental  of  two  bushels,  the  twenty-two-bushel 
tract  a  rental  of  four  bushels,  and  the  twenty-four-bushel  a 
rental  of  six  bushels.  For,  the  cultivator  who  rents  land  from 
the  first  tract  at  six  bushels,  or  from  the  second  at  four,  will 
be  on  the  same  level  with  the  one  who  gets  land  on  the  third 
tract  at  two,  or  on  the  fourth  for  nothing.  The  general  law 
is  now  evident :  As  population  increases,  lands  of  lower  and 
lower  degrees  of  fertility  come  into  cultivation,  and  the  better 
lands  command  rent.  If  there  is  every  grade  of  land  within 
convenient  reach,  then  the  rental  will  be  equal  to  the  excess  of 
fertility  of  the  best  soil  over  that  of  the  poorest  soil  which  it 
•will  pay  to  cultivate. 

32.  In  the  preceding  exposition  we  have,  for  simplicity,  com- 
pared lands  as  if  the  rental  depended  solely  upon  their  fertility. 
But  other  causes  come  into  play  which  can  be  brought  into 
the  same  class  by  an  extension  of  the  word  "  fertility."  We 
have  supposed  that  with  a  certain  amount  of  labor  and  capital 
laud  would  yield  eighteen,  twenty,  twenty-two,  and  twenty-four 
bushels  to  the  acre.  The  general  question  is  not,  however,  that 
of  the  number  of  bushels  to  the  acre,  but  that  of  the  number 
of  bushels  to  a  given  amount  of  labor.  When  we  use  acres 
to  illustrate  the  case  we  tacitly  suppose  that  the  labor  of  culti- 
vation is  proportional  to  the  acres.  If  from  any  cause  what- 
ever it  should  cost  twice  as  much  labor  to  cultivate  an  acre  of 
one  farm  as  of  another,  the  fertility  of  the  first  per  acre  would 
have  to  be  twice  as  great  in  order  to  command  the  same  fraction 
of  the  produce  as  rent.  We  must  therefore  interpret  the  word 
fertility  as  meaning  the  yield  for  a  given  amount  of  labor,  and 
not  the  yield  per  acre. 


III.  33.]  THE  RENT  OF  LAND.  245 

In  tlie  next  place,  we  have  supposed  that  the  crops  from 
the  different  farms  compared  were  all  equally  accessible  to  the 
market.  If  this  is  not  so,  then  the  land  farthest  from  the  mar- 
ket will  be  at  a  relative  disadvantage.  But  this  again  will  be 
brought  into  the  rule  by  including  in  the  cost  of  cultivation 
that  of  taking  the  crop  to  market.  The  rule  will  then  be  that 
those  lands  from  which  crops  can  be  gathered  and  brought  to 
market  with  the  least  total  expenditure  of  labor  will  command 
a  higher  rent. 

33.  delation  of  Rent  to  Price  of  Breadstuffs.  In  the 
case  we  have  been  supposing  the  tenants  of  the  best  farms  will 
be  paying  to  the  land-owners  a  rent  of  six  bushels  of  wheat 
per  acre  per  annum.  In  order  that  they  may  be  able  to  com- 
pensate themselves,  they  must  get  such  a  price  for  the  remain- 
ing twenty  bushels  of  their  wheat  as  to  return  to  them  all  they 
have  expended  in  labor  and  material.  That  is,  the  price  of  wheat 
must  be  high  enough  to  pay  for  all  the  labor  and  capital  ex- 
pended in  cultivation,  and  to  make  good  the  rent.  This  fact 
has  given  rise  to  the  impression  that  the  price  of  wheat  is  in- 
creased by  the  rent  of  land. 

A  close  examination  will,  however,  show  that  this  view  re- 
verses the  relation  of  cause  and  effect.  It  is  the  high  price  of 
wheat  which  causes  rent,  and  not  rent  which  causes  the  high 
price.  That  is,  rent  is  an  effect,  not  a  cause,  of  the  high  price. 
The  simplest  way  to  show  this  is  to  refer  to  the  two  first  laws 
of  supply  and  demand  (Chapter  III.).  These  laws  being  true 
for  each  separate  market,  must  be  true  at  any  one  moment  for 
the  world  at  large.  According  to  the  first  law,  when  the  price 
of  wheat  is  fixed  at  any  given  figure  there  will  be  a  certain 
definite  quantity  which  can  be  sold  at  that  price.  If  only 
a  certain  number  of  bushels  are  brought  to  each  market, 
then  it  will  command  in  that  market  a  price  which  will  be 
hisrher  the  fewer  the  number  of  bushels  brought.  The  buver 

O  C7  W 

need  not  ask  or  care  why  the  supply  is  plentiful  or  scarce.     All 
that  concerns  him  is  to  get  his  wheat  at  the  lowest  possible 


246  THE  LAWS  OF  SUPPLY  AND  DEMAND.        [III.  33. 

price.  And  if  other  people  are  ready  to  buy  all  that  comes  at 
a  certain  price,  he  also  has  got  to  pay  that  price  or  go  without 
the  wheat.  Hence  the  price  depends  upon  the  quantity  of 
wheat  brought  to  market.  . 

Now,  it  is  quite  true  that  if  all  the  land-owners  from  whom 
it  was  possible  to  obtain  a  supply  of  wheat  could  by  combin- 
ing among  themselves  prevent  more  than  a  certain  number 
of  bushels  per  annum  from  being  produced,  or,  what  amounts 
to  the  same  thing,  if  they  would  not  allow  any  one  to  have  their 
farms  except  at  a  higher  rental  than  the  natural  one  just  laid 
down,  then  they  would  raise  the  price.  But  this  would  only 
be  because  some  of  the  tenants  would  refuse  to  cultivate  the 
farms  on  such  terms,  so  that  less  wheat  would  be  raised. 
Such  a  combination  is  practically  out  of  the  question.  Even 
if  it  were  practised,  it  would  not  be  a  case  of  high  rents 
causing  high  prices,  but  only  a  case  of  artificial  scarcity  caused 
by  a  combination  on  the  part  of  the  landlords  to  raise  the 
price  of  wheat  and  thus  to  enable  them  to  charge  more  rent. 

To  sum  up :  Wheat  is  high  because  only  a  certain  limited 
quantity  is  brought  to  market. 

No  more  is  brought  to  market  because  more  cannot  be 

o 

raised  without  having  recourse  to  less  fertile  lands,  which  it 
will  not  pay  to  cultivate  until  the  price  is  yet  higher. 

The  cost  to  the  farmer  of  raising  any  particular  portion  of 
wheat  brought  to  market  has  nothing  to  do  with  the  price  at 
which  it  can  be  sold. 

To  dispose  yet  more  clearly  of  this  view,  let  us  trace  the 
chain  of  causes  in  the  opposite  direction.  Suppose  one  or  all 
the  owners  of  the  best  class  of  farms  actuated  by  the  philan- 
thropic desire  to  make  the  cost  of  bread  to  the  public  as  low  as 
possible.  They  therefore  offer  the  lands  to  their  tenants  free 
of  rent.  Will  the  price  of  wheat  fall  in  consequence?  Not 
at  all.  This  remission  of  rent  would  not  increase  the  quantity 
of  wheat  which  the  farms  would  yield.  The  tenants  would 
take  the  same  amount  to  market  as  before.  The  same  amount 
being  brought  to  market,  it  would  command  the  same  price. 


RENT.  247 

The  only  effect  would  therefore  be  that  the  tenants  would 
themselves  pocket  the  rent  which  they  had  formerly  paid  to 
the  landlords. 

EXERCISES. 

1.  Is  it  necessary  to  rent  that  there  should  be  a  regular  gradation  of  fer- 
tility down  to  no-rent  lands?    For  example,  if  in  the  case  supposed  in  §  31 
the  first  two  tracts  should  be  of  equal  fertility,  and  all  the  rest  of  the  region 
utterly  barren,  would  the  fertile  tracts  command  rent? 

2.  If  one  should  claim  that  no  land  commanded  any  other  rent  than 
interest  on  the  capital  invested  iu  it,  how  would  you  test  the  truth  of  his 
claim? 

3.  Show  how  the  theory  of  rent  applies  in  a  country  where  the  farmer 
owns  the  land  instead  of  hiring  it.     What  element  then  takes  the  place  of 
annual  rent? 

4.  Why  is  land  more  highly  cultivated  in  England  than  in  America? 

5.  Why  is  the  rent  of  land  so  low  in  a  state  so  densely  populated  as 
Massachusetts? 

6.  When  wheat  is  brought  to  market  for  sale,  does  the  question  what  it 
cost  the  farmer  to  raise  it  have  anything  to  do  with  the  price  he  can  com- 
mand for  it?    If  yes,  how  do  the  buyers  know  what  it  cost  in  any  particu- 
lar case,  and  how  can  the  cost  affect  the  bargaining?    If  no,  show  in  what 
way  cost  of  production  does  affect  price. 

7.  If  land-owners  were  forbidden  by  law  to  charge  rent,  what  would  be 
the  effect  upon  the  supply  and  the  price  of  breadstuffs? 

8.  Would  it  be  correct  to  say  that  it  is  of  the  very  nature  of  a  monopo- 
lized requisite  that  its  supply  cannot  be  increased  indefinitely,  even  if  the 
owner  wanted  to  do  it  ? 

9.  On  what  terms  would  the  owner  of  an  absolute  monopoly  find  it 
profitable  to  increase  the  supply  of  his  monopolized  requisite  ?    Take  as  an 
example  the  case  of  the  spices  in  the  East  Indies  already  mentioned. 

10.  What  has  been  the  effect  of  steam-transportation  upon  the  price  of 
agricultural  land  in  the  neighborhood  of  great  cities  ?    If  we  had  no  railways 
from  the  city  of  New  York,  what  would  be  the  result  upon  the  price  of 
land  in  the  neighborhood  of  New  York  and  on  the  Hudson  River  ?    Show 
according  to  what  law  the  rent  of  land  would  vary  in  such  a  case,  supposing 
the  whole  region  to  be  of  equal  fertility. 


248  TI1E  LAWS  OF  SUPPLY  AND  DEMAND.        [III.  34. 


CHAPTER  VI. 

ON   COMPETITION   AS   DETERMINING   COST. 

34.  IT  is  a  current  opinion  that  prices  are  necessarily  kept 
down  to  nearly  their  lowest  limit  wherever  free  competition  is 
permitted.  The  reason  is  briefly  this:  If  the  dealers  in  a 
commodity  do  not  sell  it  at  the  lowest  paying  price,  others 
will  step  in  and  offer  the  same  commodity  at  a  lower  price,  and 
thus  draw  away  all  the  custom  from  those  whose  charges  are 
too  high. 

This  proposition  is  sufficiently  near  the  truth  in  the  whole- 
sale trade  of  the  country,  and  with  respect  to  those  necessaries 
of  life  which  are  produced  and  sold  independently  by  great 
numbers  of  persons.  In  this  case  business  success  depends 
entirely  upon  the  producer  and  jobber  being  able  to  sell  at  the 
lowest  possible  price.  It  is  less  true  in  the  retail  markets,  and 
may  fail  entirely  in  special  cases.  We  shall  now  analyze  the 
principal  cases  in  which  it  fails.  Take  first  the  general  prin- 
ciple as  we  may  conceive  it  exemplified  by  an  example.  A 
city  dealer  sells  cloth  at  one  dollar  per  yard  which  has  cost 
him  eighty  cents  per  yard.  We  may  suppose  this  cost  to  in- 
clude all  the  expenses  of  business  and  loss  upon  waste  material, 
thus  making  the  net  profit  twenty  cents  a  yard.  It  occurs  to 
the  dealer  to  inquire  whether  by  lowering  his  price  to  ninety- 
five  cents  a  yard  he  will  get  custom  enough  to  make  good 
the  diminution  in  the  rate  of  profit.  To  effect  this  result  his 
sales  must  increase  by  at  least  one  third,  otherwise  the  dimi- 
nution of  profit  on  each  yard  from  twenty  to  fifteen  cents 
would  not  be  compensated.  Now  if,  when  he  thus  lowers  his 
price,  he  could  make  everybody  know  that  fact,  and  could  sat- 
isfy the  public  that  it  was  a  real  diminution  in  price  and  not 
merely  the  substitution  of  a  poorer  article,  he  would  succeed. 


III.  34.]     ON  COMPETITION  AS  DETERMINING  COST.          249 

But  in  the  majority  of  cases  the  cloth  will  be  purchased  only 
occasionally,  and  in  such  small  quantities  that  it  will  not  be 
worth  while  for  the  man's  customers  to  make  a  special  inves- 
tigation in  order  to  learn  about  the  diminution  of  price.  Con- 
sequently it  may  well  happen  that  his  sales  would  not  be  in- 
creased by  one  third,  and  he  would  then  lose  by  his  attempt 
to  sell  at  a  lower  price. 

The  less  important  the  commodity,  that  is,  the  smaller  the 
amount  of  money  any  one  expends  for  it  annually,  the  less 
likely  it  is  to  be  sold  at  the  lowest  possible  price.  It  is  not 
worth  any  one's  while  to  change  his  grocer  because  some  other 
grocer  sells  pepper  or  mustard  ten  per  cent  cheaper.  Even 
in  the  case  of  such  staples  as  tea  and  coffee,  it  is  so  difficult  to 
ascertain  the  quality  before  trial  that  the  customer  finds  it  a 
very  difficult  problem  to  determine  who  it  is  that  really  sells 
at  the  lowest  price,  taking  quality  into  account. 

In  such  cases,  however,  there  is  a  tendency  analogous  to 
competition  which  does  tend  to  lower  prices  by  giving  an  ad- 
vantage in  the  long-run  to  him  who  sells  the  cheapest.  Snp- 
pose  two  persons  appear  in  business,  one  of  whom  goes  on 
the  principle  of  exacting  the  highest  price  from  his  customers 
that  he  can  profitably  command,  while  another  sells  as  low  as 
he  can,  perhaps  from  mere  conscientious  motives.  The  first 
may  make  the  largest  profits  in  one  year  and  for  several  years, 
but  the  fact  that  the  second  is  a  more  economical  dealer  to 
purchase  from  will  gradually  become  known  to  a  larger  and 
larger  section  of  the  community,  so  that  he  may  ultimately 
have  the  most  profitable  business.  Moreover,  the  very  state  of 
things  which  makes  this  access  of  custom  so  slow  will  make  it 
permanent.  A  large  body  of  customers  having  become  per- 
manently satisfied  with  his  dealings  will  not  take  the  trouble 
to  investigate  whether  some  one  else  may  not  serve  them  a 
trifle  cheaper,  and  thus  he  may  be  on  the  sure  road  to  fortune. 
The  general  fact  thus  illustrated  is  this :  If  the  question  which 
suggests  itself  to  the  retailer's  mind  is,  "What  are  the  most  profit- 
able prices  for  me  to  charge  these  individual  customers  for  this 


250  TUB  LAWS  OF  SUPPLY  AXD  DEMAND.        [III.  86. 

article  ?  the  answer  may  be  very  different  from  what  it  will  be 
if  he  asks  himself  what  price  will  in  the  long-run  best  serve 
to  give  him  a  permanent  and  enduring  trade. 

35.  Cases  of  Prices  not  determined  ly  Competition.  We 
have  in  the  three  preceding  chapters  laid  down  and  illustrated 
the  law  that  if  the  price  is  above  the  normal  one  at  which 
supply  and  demand  are  balanced,  the  supply  will  exceed  the 
demand,  and  there  will  be  in  the  case  of  a  commodity  a  con- 
tinually increasing  accumulation  which  cannot  be  disposed  of. 
There  are,  however,  large  classes  of  services  in  which  the  equi- 
librium will  be  brought  about  in  a  somewhat  different  way. 
A  price  may  be  fixed  either  by  law  or  custom  for  certain 
personal  services.  If  this  price  is  below  the  normal  one,  a  suf- 
ficient number  of  people  cannot  be  found  to  render  the  services, 
and  there  will  be  an  unsupplied  demand.  If  the  fixed  price  is 
above  the  normal  one,  and  if  there  is  no  monopoly,  the  supply 
will  exceed  the  demand. 

Carriage-fares  afford  one  case  in  point.  It  is  so  difficult  to 
satisfactorily  fix  the  price  of  a  drive  in  a  carriage  by  bargaining 
between  the  passenger  and  the  driver,  that  in  nearly  all  civil- 
ized cities  a  tariff  of  prices  is  fixed  by  the  municipal  authori- 
ties. In  cities  where  this  tariff  is  low,  passengers  will  frequently 
find  it  difficult  to  secure  carriages,  because  it  will  not  pay  the 
owners  to  keep  more  carriages  than  there  is  constant  employ- 
ment for.  "When  it  is  above  the  normal  price  the  number  of 
carriages  to  be  had  will  exceed  those  which  are  necessary  to 
carry  all  the  passengers  demanding  them  at  the  fixed  rate. 
The  result  -will  be  that  a  certain  proportion  of  the  carriages 
will  stand  idle  a  large  part  of  the  time.  In  this  case  the  com- 
petition is  not  a  competition  as  regards  price,  but  a  competition 
to  secure  a  passenger  at  a  fixed  price.  It  is  a  fact  continually 
lost  sight  of  that  this  competition  is  just  as  effective  in  bring- 
ing the  compensation  of  each  individual  driver  to  the  lowest 
limit  as  would  be  a  competition  in  the  matter  of  prices.  No 
permanent  gain  can  accrue  to  individual  drivers  by  having  the 


III.  36.]     ON  COMPETITION  AS  DETERMINING  COST.          251 

tariff  raised,  unless  they  can  at  the  same  time  keep  out  compe- 
tition. If  free  competition  is  allowed,  additional  carriages  will 
be  bought,  more  men  will  go  into  the  business,  the  profits 
will  be  divided  among  a  larger  number,  and  this  process  will 
continue  until  the  individual  profits  of  each  driver  are  reduced 
to  the  lowest  point  at  which  he  is  willing  to  remain  in  the 
business. 

Another  case  is  afforded  by  the  sale  of  newspapers.  As  a 
general  rule  the  price  at  which  any  newspaper  is  sold  remains 
unchanged  through  all  the  vicissitudes  of  supply  and  demand 
for  long  periods  of  time.  The  equilibrium  is  then  kept  up 
by  publishers  accommodating  their  supply  to  the  demand,  in- 
creasing or  diminishing  it  according  as  there  is  more  or  less 
matter  of  public  interest  in  the  paper  sold. 

If  the  prices  of  all  journals  were  fixed  by  law,  custom,  or 
mutual  agreement,  the  competition  would  be  entirely  in  respect 
to  quality.  That  paper  would  get  the  largest  circulation  which 
most  pleased  its  subscribers.  The  result  would  be  that  more 
and  more  labor  and  expense  would  be  devoted  to  its  produc- 
tion, and  by  this  competition  the  profits  would  again  be  brought 
to  their  lowest  limit. 

36.  Cases  where  Competition  is  Difficult.  In  the  preced- 
ing cases  we  have  supposed  the  service  to  be  such  that  it  can 
be  easily  rendered,  and  that  great  numbers  of  people  can  en- 
gage independently  in  rendering  it.  But  in  recent  times  a 
large  and  important  class  of  services  have  sprung  up,  in  which 
the  amount  of  wealth  and  organizing  ability  required  to  render 
them  is  so  great  that  a  temporary  monopoly  may  be  established, 
though  none  is  legalized.  Then  this  monopoly  may  be  ren- 
dered permanent,  or  at  least  may  be  continued  through  many 
years,  by  skilful  management.  Such  a  case  is  seen  in  the  tele- 
graph system  of  the  United  States.  "When  a  single  company 
possesses  the  only  line  between  two  cities,  or  over  a  certain 
region  of  country,  it  can  fix  its  own  price  for  messages.  It 
may  find  it  profitable  to  keep  this  price  far  above  the  nor- 


252  TUB  LAWS  OF  SUPPLY  AND  DEMAND.        [III.  87. 

mal  rate,  rather  than  to  enlarge  its  facilities,  so  that  a  great 
number  of  messages  can  be  sent  at  a  low  rate.  If  a  competing 
company  is  proposed,  its  promoters  may  foresee  that,  at  the  low 
prices  to  which  competition  would  lead,  it  would  be  unable  to 
make  a  profit.  It  may  therefore  stay  out  of  the  competition 
lon«-  after  the  business  would  be  sufficient  to  give  it  a  paying 
profit,  were  they  secure  against  a  fall  in  prices.  During  all  this 
period  of  doubt  and  uncertainty  the  first  company  has  the  field 
to  itself.  Suppose  at  last  a  competing  company  to  build  a  new 
line,  and  to  take  messages  at  a  low  rate ;  if  this  low  rate  is  not 
as  profitable  as  a  higher  one  would  be,  the  two  companies  may 
combine  in  some  way,  or  the  more  wealthy  may  buy  out  the 
poorer  one,  so  that  the  monopoly  shall  still  be  kept  up.  The 
whole  history  of  telegraph  companies  in  the  United  States  has 
been  of  this  character.  It  is  supposed  that  great  numbers  of  small 
companies  have  been  established  for  the  sole  purpose  of  being 
bought  out  by  more  powerful  rivals,  in  order  that  the  latter 
might  continue  their  temporary  monopoly. 

It  will  be  seen  that  the  only  cases  in  which  individual  pro- 
fits can  be  kept  permanently  above  their  normal  minimum  is 
that  in  which  some  monopoly  is  owned  by  the  producer.  This 
monopoly  may  be  one  of  individual  skill,  knowledge  of  busi- 
ness, or  the  possession  of  some  natural  agent. 

37.  Competition  among  Business  Managers.  We  have 
seen,  in  treating  of  labor,  what  an  almost  infinite  variety  there 
is  in  the  employments  which  men  engage  in  for  pay.  The  nat- 
ural endowments  of  men  by  which  they  are  qualified  for  one 
or  another  employment  also  differ  in  an  important  degree. 
Considered  in  their  effects,  these  differences  in  capacities  are 
enormously  greater  than  they  appear  when  considered  in  them- 
selves. To  illustrate  what  we  mean,  consider  the  difference 
between  the  captain  of  a  great  steamship  and  one  of  the  sailors. 
They  differ  very  slightly  in  bodily  structure,  and  the  sailor  has 
the  same  general  mental  qualities  as  the  captain.  He  speaks 
the  same  language,  and  there  are  a  great  many  things  which  he 


III.  37.]    ON  COMPETITION  AS  DETERMINING  PRICE.         253 

knows  how  to  do  better  than  the  captain  does.  The  superi- 
ority of  the  captain  consists  in  this,  that  he  knows  how  to 
navigate  and  direct  the  ship,  while  the  sailor  does  not.  This 
is  a  very  small  difference  in  itself.  But,  small  as  it  is,  it  makes 
all  the  difference  between  conveying  the  ship  safely  to  port 
and  losing  a  million  of  dollars  and  a  thousand  lives  by  wreck- 
ing her. 

"We  have  now  to  show  how  the  law  of  supply  and  demand  oper- 
ates in  consequence  of  these  great  diversities  in  natural  and  ac- 
quired capacities.  The  question  is,  what  cause  determines  the 
rate  of  compensation  in  any  particular  employment,  or  the  in- 
come which  a  man  can  gain  in  any  business.  To  avoid  wander- 
ing through  a  wilderness  of  different  occupations,  let  us  take  as 
examples  the  various  operations  necessary  to  the  production  of 
shirts.  We  shall  then  suppose  a  person  to  have  his  choice  be- 
tween becoming  a  field-hand,  a  planter  engaged  in  raising  cot- 
ton, a  cotton-broker,  an  operative,  a  manager  of  a  cotton-mill,  a 
dealer  in  cotton  cloth,  a  manufacturer  of  shirts,  or  a  shirt-dealer. 

If  these  different  occupations  could  be  equally  well  pursued 
by  all  men,  it  is  evident  that  the  most  agreeable  would  be  pre- 
ferred. The  occupations  of  planter,  manager,  and  broker  are 
more  agreeable  than  that  of  the  operative,  and  the  latter  is 
more  agreeable  than  that  of  the  field-hand.  Hence  there  would 
be  more  competition  in  the  first  three  occupations  than  in  the 
two  last,  and  the  field-hand  would  gain  the  highest  income 
among  all  engaged  in  producing  shirts.  But  we  know  that 
this  is  not  the  case.  The  reason  is  obvious.  The  number  of 
people  who  are  qualified  to  become  brokers,  managers,  and 
merchants  is  very  small,  while  the  large  majority  of  men  are 
born  capable  of  being  trained  for  the  position  of  field-hand. 
"Were  it  not  for  this  great  diversity  in  natural  capacities,  we 
should  have  the  singular  result  that  the  occupations  we  now 
consider  the  lowest  would  be  best  paid. 

To  fix  the  ideas,  let  us  suppose  the  number  of  people  who 
are  required  to  supply  shirts  to  the  population  of  New  York 
City  to  be  as  follows : 


254  THE  LAWS  OF  SUPPLY  AND  DEMAND.        [III.  37. 

1,000  field-hands, 
50  planters, 
10  cotton-brokers, 
2,000  operatives, 

5  managers  of  factories, 
100  shirt-dealers. 

Suppose,  however,  that  instead  of  the  number  of  persons 
qualified  to  perform  these  functions  in  the  best  manner  being 
in  the  same  proportion,  they  are  in  some  such  proportion  as 

this: 

10,000  field-hands, 

40  planters, 
5  brokers, 
10,000  operatives, 

3  managers  of  factories, 
1,000  shirt-dealers. 

"We  see  that  there  is  a  comparative  scarcity  in  the  number  of 
persons  qualified  as  planters,  brokers,  and  managers.  To  under- 
stand exactly  what  this  signifies,  we  must  remember  that,  when 
we  speak  of  the  number  being  thus  limited,  we  do  not  mean 
that  only  this  number  could  by  hook  or  by  crook  follow  these 
occupations.  What  we  mean  is  that  the  number  who  can  fill 
them  in  the  most  advantageous  manner  is  thus  limited,  and 
that,  in  consequence  of  this,  they  can  in  a  certain  sense  defy 
competition. 

To  show  what  the  result  of  this  is,  let  us  compare  two 
cotton-brokers  who  at  first  sight  may  seem  to  be  about  equal 
in  ability.  But  one  is  not  a  good  judge  of  cotton,  does  not 
know  what  farmers  are  most  to  be  relied  on,  does  not  know 
exactly  what  kind  of  cotton  will  bring  the  highest  price,  cannot 
well  judge  what  the  state  of  the  market  will  be  next  j*ear,  and 
does  not  know  the  cheapest  way  of  getting  his  cotton  to  the 
manufacturer.  The  other  broker  knows  all  these  things.  The 
skilful  broker  then  outbids  the  other  with  the  most  honest 
farmers,  buys  the  best  kind  of  cotton,  especially  that  kind  of 
cotton  which  in  a  few  months  is  going  to  rise  in  price,  has  his 


in.  38.]    0^  COMPETITION  AS  DETERMINING  PRICE.         255 

stock  well  boused,  and  gets  it  to  the  manufacturer  at  a  cheap 
route,  and  by  a  line  of  railway  wbicb  is  reliable  in  its  manage- 
ment. Tbe  poorer  broker  outbids  his  keener  neighbor  with 
another  class  of  farmers,  buys  cotton  which  is  going  to  fall  in 
price,  finds  that  it  is  not  of  the  quality  which  lie  expected, 
learns  when  too  late  that  somebody  has  cheated  him  by  putting 
stones  inside  the  bales,  has  a  lot  of  cotton  damaged  by  getting 
wet,  pays  more  for  transportation  to  the  manufacturer,  and 
finds  he  has  to  sell  it  at.  a  lower  price  because  the  market  is 
glutted  with  that  particular  kind  of  cotton.  At  the  end  of  the 
year  he  may  find  that  he  has  made  just  $5  as  the  result  of  the 
year's  business,  while  his  more  skilful  neighbor  may  find  that 
he  has  made  $50,000. 

The  same  principle  holds  true  in  the  management  of  the  fac- 
tory. The  poor  manager  buys  the  wrong  kind  of  cotton  at  the 
wrong  time,  does  not  know  how  to  mix  it  properly,  gets  it 
wasted,  finds  his  machinery  getting  out  of  order,  cannot  make 
his  operatives  work  together  in  the  most  advantageous  manner, 
and  does  not  know  the  right  time  to  sell.  If  there  were  no 
other  manager  who  could  do  better  than  he,  he  would  still  be 
able  to  live.  But  there  may  be  a  single  competitor  who  will 
know  how  to  arrange  these  matters  by  avoiding  all  waste  and 
having  all  the  operations  conducted  in  the  most  advantageous 
manner.  He  will  sell  his  goods  at  so  low  a  rate  as  to  drive 
his  competitors  out  of  business,  and  at  the  same  time  make 
a  fortune  for  himself.  Whether  the  breadstuffs  and  other 
products  which  are  every  year  brought  from  the  far  West  to 
the  Atlantic  seaboard  shall  cost  $100,000,000  or  only 
$80,000,000  for  transportation  depends  entirely  upon  the  skill 
of  a  few  dozen  railway  managers.  The  managers  who  can 
bring  them  for  $80,000,000  will  drive  the  others  out  of  busi- 
ness and  make  $20,000,000  profit  for  their  companies. 

38.  All  these  cases  of  special  skill  in  business  management 
are  examples  of  a  graduated  monopoly  of  the  same  kind  as 
that  in  the  ownership  of  the  soil.  Let  us  imagine  ourselves 


256  2'2/tf  LAWS  OF  SUPPLY  AND  DEMAND.        [III.  39. 

able  to  measure  and  record  the  business  ability  of  every  man 
in  the  country.  The  result  would  be  of  this  general  nature  : 
that  a  dozen  men  might  be  ranked  in  the  highest  class,  a  score 
or  two  in  a  class  a  shade  below,  a  hundred  in  a  third  class, 
several  hundred  in  a  fourth  class,  and  so  on.  Since  there  is  more 
business  than  can  be  transacted  by  the  half-dozen  highest  classes 
on  this  scale,  it  follows  that  the  latter  will  be  able  to  command 
or  gain  by  their  services  an  income  proportionate  to  their  su- 
periority over  the  lowest  class  that  can  make  a  living.  These 
incomes  will  be  gained  by  such  wise  management  that  the  in- 
evitable waste  of  material  and  labor  shall  be  reduced  to  a  mini- 
mum, and  that  the  product  shall  be  what  consumers  most  want. 

39.  The  principle  involved  can  be  seen  in  another  case. 
Let  us  imagine  that  among  a  tribe  of  savages  one  man  has 
learned  to  make  first-class  fire-arms  and  excellent  gunpow- 
der. His  fellows  see  how  he  does  it,  and  they  find  that  they  can 
also  make  a  kind  of  gunpowder  and  of  fire-arms.  But,  through 
want  of  knowledge,  what  they  make  is  so  poor  in  quality  that 
they  can  seldom  get  near  enough  to  an  animal  to  shoot  it. 
The  skilful  man  understands  the  chemistry  of  the  subject  so 
well  that  with  his  gunpowder  and  arms  a  buffalo  can  be  shot 
before  the  animal  sees  the  huntsman.  Then  the  skilful  man 
could,  without  injuring  his  fellows,  charge  for  his  services  the 
whole  advantage  which  he  gave  them.  He  could,  perhaps,  if 
the  tribe  was  a  thousand  strong,  charge  for  his  powder  and 
guns  one  half  of  all  the  game  killed  with  them,  and  the  rest 
of  the  tribe  would  find  it  more  advantageous  to  pay  this  price 
than  to  use  the  best  weapons  they  could  themselves  make. 
Morever,  this  bargain  would  not  be  to  their  disadvantage,  since 
the  skilful  man  could  never  command  more  from  them  than 
the  value  of  the  advantage  he  afforded. 


III.  40.]      OF  PROFITS  AND  COST  OF  PRODUCTION.  267 

CHAPTER  VII. 

OF   PROFITS   AND   COST  OF   PRODUCTION. 

4O.  AT  a  first  glance  the  term  "  cost  of  production  "  may 
seem  perfectly  definite  and  precise  in  meaning.  When,  in  ac- 
cordance with  universal  practice,  it  is  measured  by  money,  it 
signifies  the  value  of  the  labor  and  money  which  the  producer 
must  expend  in  order  that  an  article  may  be  produced.  If  for 
each  yard  of  a  certain  kind  of  cotton  the  owner  of  a  factory  is 
obliged  to  pay  out  a  certain  sum  of  money  for  labor,  materials, 
repair,  interest,  etc.,  then  the  cost  of  production  is  said  to  be 
that  sum  per  yard.  When  the  cotton  is  sold,  the  excess  of 
money  received  after  paying  all  expenses  connected  with  the 
sale  is  called  profits,  and.  is  supposed  to  be  the  share  received 
by  the  owners  of  the  factory  as  the  result  of  the  skill,  enter- 
prise, and  capital  which  they  have  invested  in  the  work.  If  we 
trace  out  what  the  factory  pays,  we  find  it  to  be  divisible  into 
•wages  and  cost  of  material.  But  the  materials  which 
are  purchased  cost  labor,  and  this  labor  has  to  receive  its  wages 
from  the  proceeds  of  the  sale.  Following  the  process  backward 
step  by  step,  it  was  found  that  everything  paid  for  the  manu- 
factured product  might  be  divided  into  three  parts,  namely : 

I.  Kent  which  was  received  by  the  owners  of  the  soil  from 
which  the  original  materials  were  obtained. 

II.  Wages  paid  for  labor  expended  in  production. 
When  the  manufacturer  sells  the  product  he  must  get  both 

these  items  back  again  with  a  surplus,  else  he  cannot  continue 
business.  The  surplus  is  his  share  of  the  money  received,  and  is 
called  his  profit.  Thus  we  have  a  third  element  in  the  price 
of  the  product,  namely — 

III.  Profits,  or  the  share  of  the  gross  amounts  realized 
which  constitute  the  gains  of  the  manufacturer  or  employer 
of  labor. 

17 


258  TEE  LAWS  OF  SUPPLY  AND  DEMAND.        [III.  41. 

This  was  the  theory  of  the  leading  economists  a  generation 
or  two  ago.  But  it  fails  to  satisfy  the  requirements  of  the 
present  time.  It  is  now  seen  that  rent  and  payment  for  any 
monopolized  elements  of  production  should  be  included  in 
the  same  class.  Hence  if  we  arc  to  consider  rent  as  part  of 
such  cost,  we  should  also  include  everything  that  the  owners 
of  mines,  the  organizers  of  labor,  and  the  possessors  of  material 
limited  in  supply  can  command  over  and  above  the  ordinary 
wages  of  labor.  Again,  the  profits  of  the  manufacturer  are 
really  his  compensation  for  the  skill  and  capital  which  he  in- 
vests in  his  enterprise.  In  so  far  as  they  are'  gains  made-  by 
the  use  of  his  organizing  powers  they  are  products  of  his  labor, 
and  therefore  may  be  considered  as  wages  when  that  term  is 
used  in  its  most  extended  sense  (II.  34).  That  portion  which 
represents  profit  upon  the  capital  invested  should  be  considered 
as  interest  on  capital.  Thus  profits  are  divisible  into  the  two 
parts  wages,  or  gains  by  labor,  and  interest  on  capital. 

41.  It  is  unnecessary  to  develop  the  subject  from  this  point 
of  view,  because  without  greater  precision  the  classification  can 
serve  no  useful  purpose.  To  show  the  difficulties  in  the  way 
of  a  rule  for  estimating  cost  of  production  which  shall  suit 
every  case,  let  us  suppose  the  possessor  of  a  valuable  bed  of 
iron  ore  who  has  in  his  employ  a  chemist  and  an  engineer,  each 
possessing  extraordinary  skill  in  conducting  the  processes  nec> 
essary  to  the  smelting  and  casting  of  the  iron  which  comes  from 
his  bed.  Now,  the  way  he  would  estimate  the  cost  of  produc- 
ing iron  is  this :  "  This  bed  of  iron  is  of  great  value ;  I  should 
have  to  pay  two  hundred  thousand  dollars  for  it"  (perhaps  he 
did  pay  two  hundred  thousand  to  get  it).  "The  annual  inter- 
est on  this  money  is  ten  thousand  dollars.  I  have  to  pay  sala- 
ries of  ten  thousand  dollars  each  to  two  scientific  experts ;  an 
equal  salary  to  a  business  assistant,  whose  services  are  of  great 
value.  I  also  have  to  pay  great  sums  for  the  use  of  certain 
patents  in  the  manufacture  of  steel.  Moreover,  ray  own  or- 
ganizing ability  and  knowledge  of  the  business  are  of  great 


III.  42. J      OF  PROFITS  AND  COST  OF  PRODUCTION.  259 

value.  Since  they  will  on  the  average  enable  me  to  gain  a 
large  sum  per  annum,  forty  thousand  dollars  or  more,  I  there- 
fore estimate  them  at  that  figure."  Adding  up  all  these  items, 
he  will  obtain  the  cost  of  production  per  ton  of  the  various 
kinds  of  iron  which  he  turns  out. 

A  little  consideration  will  show  us  that  this  cost  of  produc- 
tion will,  in  practice  and  in  the  long-run,  mean  very  nearly 
the  same  thing  as  the  price  he  can  get  for  his  iron.  For  if, 
during  a  long  series  of  years,  he  can  command  a  price  very 
much  above  the  ordinary  cost  of  production,  it  must  be  because 
he  possesses  a  monopoly  of  some  kind,  either  in  the  quality  of 
his  ore,  the  skill  of  his  assistants,  or  his  own  knowledge  and 
organizing  abilities.  "Whatever  this  monopoly  consists  in,  it 
will  be  valuable  in  proportion  to  the  gains  it  enables  him  to 
secure,  and  its  use  will  therefore  be  charged  to  cost  of  pro- 
duction. Nor  can  we  stop  him  from  doing  this.  He  may  sell 
out  to  another  man  all  his  monopolies  except  his  own  knowl- 
edge and  skill,  and  may  sell  him  the  product  of  that  knowl- 
edge and  skill  in  so  far  as  they  are  embodied  in  the  organiza- 
tion of  the  work,  for  a  sum  proportioned  to  the  gains  of  the 
establishment.  Then,  since  the  buyer  has  had  to  pay  so  great  a 
sum  of  money,  it  is  quite  reasonable  that  he  shall  include  all 
these  items  for  which  he  has  had  to  pay  in  the  cost  of  produc- 
tion. 

42.  There  is,  however,  another  sense  in  which  we  should 
make  an  entirely  different  estimate.  It  might  be  claimed  that  it 
cost  a  man  nothing  to  use  his  own  faculties  or  to  manage  his  own 
capital.  If  his  machinery  would  wear  out  as  fast  in  standing 
idle  as  when  running,  we  might  say  that  it  cost  him  nothing  to 
run  his  machinery.  So  it  costs  the  land-holder  nothing  to  rent 
his  land.  The  iron  ore  still  under  ground,  though  it  may 
have  been  sold  for  millions  of  dollars,  has  never  cost  anybody 
anything  except  the  trouble  of  finding  it.  The  original  discov- 
erer got  a  grant  of  it  from  the  government ;  he  sold  his  rights 
to  some  one  else ;  the  buyer  sold  them  again,  and  thus  they 


260  THE  LAWS  OF  SUPPLY  AND  DEMAND.        [III.  42. 

passed  from  hand  to  hand,  increasing  in  value  as  the  richrfess  of 
the  ore  became  known.  But  this  increase  of  value  cost  nobody 
anything  more  than  the  labor  of  learning  the  value  of  the  ore. 

We  may  thus  form  a  new  conception  of  cost  of  production 
by  not  counting  as  such  cost  anything  except  the  labor  which 
has  been  actually  devoted  by  men  to  the  production,  and  valu- 
ing this  labor  by  the  same  standard  that  we  value  other  kinds 
of  labor.  In  making  this  new  estimate  we  leave  out  of  consid- 
eration everything  that  is  paid  for  monopolies  of  any  kind. 
We  therefore  take  from  the  cost  the  rent  of  land,  the  money 
paid  for  the  bounties  of  nature,  the  high  salaries  of  skilled  em- 
ployes, and  the  gains  which  the  owners  make  by  their  special 
skill.  To  distinguish  this  diminished  cost  of  production  from 
the  one  already  described,  we  shall  call  it  net  cost. 

It  is  now  necessary  to  have  some  criterion  for  determining 
what  we  shall  consider  the  net  cost.  Such  a  criterion  is  af- 
forded by  economic  science,  and  may  be  arrived  at  as  follows : 
Let  us  suppose  the  price  of  a  commodity  to  gradually  and  con- 
tinually fall  from  month  to  month  and  from  year  to  year,  with 
no  hope  of  its  ever  again  rising.  A  first  approximation  to  the 
net  cost  of  production  to  any  individual  producer,  whether  a 
person  or  a  company,  would  then  be  the  price  at  which  the 
producer  would  abandon  business  entirely. 

A  little  reflection  will  show  that  this  is  a  legitimate  defini- 
tion from  the  second  point  of  view  just  outlined.  For  no  per- 
son or  company  can  or  will  go  on.  producing  indefinitely  at  a 
loss.  He  may  do  so  temporarily,  hoping  for  prices  to  be  higher 
in  the  future.  But  if  they  are  never  to  be  any  higher,  which 
is  the  case  we  have  supposed,  then  the  producer  will  immediately 
stop  when  he  ceases  to  gain. 

It  is  evident  that  this  stopping-point  may  be  far  below  what 
is  estimated  as  cost  of  production  by  the  first  method.  In  the 
first  place,  the  millions  of  dollars  which  the  unfortunate  owner 
paid  for  the  mine  do  not  count  at  all.  His  mine  is  worth  to 
him  just  what  he  can  make  out  of  it ;  and  it  makes  no  differ- 
ence, so  far  as  his  interests  at  the  present  time  are  concerned, 


HI.42.]      OF  PROFITS  AND  COST  OF  PRODUCTION.  261 

whether  he  got  it  for  nothing  or  paid  a  million  dollars  for  it. 
If  he  can  make  any  money  out  of  it  he  will,  and  if  he  cannot 
he  will  give  it  up.  In  the  next  place,  as  lie  finds  his  profits 
diminishing,  he  will  have  to  inform  his  skilled  assistants  and 
manager  that  they  must  either  submit  to  a  reduction  of  their 
wages  or  allow  the  establisment  to  go  out  of  business.  The 
result  will  be  the  reduction  of  all  wages  to  the  lowest  point 
which  will  suffice  to  retain  the  services  of  the  different  grades 
of  employes.  If  these  employes  are  able  to  use  their  special 
skill  in  other  pursuits  with  equal  advantage,  they  will  soon  seek 
for  such  pursuits.  But  it  is  one  of  the  marks  of  monopolized 
skill  that  it  cannot  generally  be  employed  advantageously  in 
many  directions.  The  skilled  employes  of  all  grades  would 
therefore  have  to  submit  to  a  greater  or  less  reduction.  Final- 
ly,-if  the  owner  or  company  themselves  cannot  advantageously 
change  their  capital,  which,  as  a  matter  of  fact,  they  may  find 
to  be  the  case,  they  will  have  to  be  satisfied  as  long  as  they  are 
making  a  fair  living. 

Let  the  reader  not  forget  the  object  of  this  criterion  for  de- 
termining net  cost  of  production.  We  are  not  showing  that 
under  any  probable  or  conceivable  circumstances  would  the  pos- 
sessors of  skill  and  capital  be  thus  reduced  to  what  would  seem 
to  them  penury.  We  are  supposing  an  ideal  state  of  things : 
one  in  which  the  possessors  of  monopolies  would  be  unable  to 
command  more  than  if  they  did  not  possess  them.  We  are  try- 
ing to  divide  what  is  commonly  called  cost  of  production  into 
two  parts :  the  value  of  special  monopolies,  and  what  is  really 
paid  for  non-monopolized  labor  and  services.  We  eliminate 
the  monopolized  elements  by  supposing  the  price  to  diminish 
until  those  elements  cease  to  be  of  special  value  to  their  owner, 
at  least  in  the  particular  direction  in  which  they  are  used. 
Then  we  have  the  net  cost  of  production  as  it  would  be  were 
the  most  skilful  business  managers  and  other  possessors  of 
monopolized  elements  brought  down  to  the  general  level  of 
their  fellow-men  of  the  same  class. 


•_V,o  TUB  LAWS  OF  SUPPLY  AND  DEMAND.        [III.  48. 

43.  The  elements  which  enter  into  net  cost  of  production 
as  thus  defined  are : 

I.  Wage*,  measured  on  the  lowest  scale  for  which  any  of 
the  pei-sons  concerned  would  be  willing  to  continue  work. 

II.  Interest  on  capital  invested  in  the  work. 

III.  Taxes,  insurance,  and  other  miscellaneous  items  inci- 
dental to  production. 

Whatever  the  producer  receives  for  his  products  above  the 
net  cost  of  production  thus  defined  may  properly  be  considered 
as  his  profit.  It  includes  the  gains  of  himself  and  his  imme- 
diate employes  arising  from  their  special  skill,  the  interest  on 
whatever  money  he  may  have  sunk  in  the  enterprise  and  be 
unable  to  command  again,  by  sale  or  otherwise,  as  well  as  the 
gains  from  monopolies  of  every  kind.  No  one  knows,  and  no 
one  can  estimate  with  precision,  what  the  profits  are  in  any 
special  case.  We  know  by  experience  that  there  are  certain 
products  the  prices  of  which  are  subject  to  great  fluctuations 
from  year  to  year.  We  also  know  that  there  are  certain  estab- 
lishments which  continue  in  operation  through  a  period  of 
years  at  the  lowest  price,  without  any  positive  hope  that  prices 
will  be  higher  in  the  immediate  future.  If  prices  do  finally 
rise,  it  cannot  be  supposed  that  the  net  cost  of  production  rises 
in  anything  like  the  same  proportion.  We  may  therefore  fairly 
suppose  that  when  prices  are  high  the  producers  are  gaining  a 
profit  not  necessarily  equal  to  the  whole  increase  of  price,  but 
certainly  equal  to  an  important  fraction  of  it. 


III.  44.]        EQUILIBRIUM  OF  SUPPLY  AND  DEMAND.  263 


CHAPTER  VIII. 

PRESERVATION   OF   EQUILIBRIUM   BETWEEN  SUPPLY  AND  DEMAND. 

44.  LET  us  begin  by  supposing  method  of  doing  business 
quite  different  from  that  considered  in  the  preceding  chapters. 
If  we  visit  a  port  in  the  East  Indies,  a  trader  will  come  on 
board  with  silks,  cashmeres,  and  other  products  of  the  country 
for  sale.  The  ship  is  then  his  market,  and  the  passengers  the 
buyers.  But  his  price  will  not  be  fixed  by  any  sucli  consider- 
ations of  the  state  of  this  market  as  enter  into  the  calculations 
of  the  wholesale  dealer ;  his  only  object  is  to  get  the  highest 
possible  price  from  each  individual  passenger.  If  one  pas- 
senger would  be  willing  to  give  $100  for  a  shawl  rather  than 
go  without  it,  another  $60,  and  a  third  only  $40,  the  trader 
would  endeavor  to  get  these  separate  sums  for  the  same  kind 
of  a  shawl  from  the  three  separate  parties.  In  such  a  case, 
in  the  absence  of  any  communication  among  the  different 
passengers,  the  price  would  be  merely  the  result  of  mutual 
guessing ;  the  trader  trying  to  guess  how  much  the  passenger 
would  give,  and  the  passenger  to  guess  how  little  the  trader 
would  take.  There  would  therefore  be  no  definable  law  to 
regulate  the  price. 

So  far  as  the  willingness  and  state  of  mind  of  buyer  and 
seller  are  concerned,  the  same  thing  may  be  considered  as 
holding  true  in  all  cases.  There  are  in  the  community  a  cer- 
tain number  of  people  who  would  give  $20,  $30,  or  $40  a 
barrel  for  flour  rather  than  go  without  it.  If  their  flour-dealer 
could  keep  them  ignorant  of  the  market  price,  he  might  exact 
this  extreme  limit  of  price  for  his  flour.  But  the  state  of 
things  which  exists  in  the  wholesale  markets  of  every  civilized 
country  prevents  any  such  operation.  The  general  rule  is  that 
goods  must  be  sold  at  the  same  price  to  all  comers.  A  trader 


264  TnE  LAWS  OF  SUPPLY  AND  DEMAND.        [III.  45. 

who  should  exact  a  higher  price  because  his  customer  chanced 
to  be  for  the  moment  ignorant  of  the  market  price  would  soon 
lose  his  business  standing.  It  is  only  in  the  case  of  retail  and 
short-sighted  shop-keepers  that  the  attempt  is  now  practised. 
The  result  is  that  if  any  commodity  is  offered  at  a  certain  price 
P,  the  buyers  will  comprise  all  those  persons  who  are  willing 
to  pay  either  P  or  any  higher  price. 

We  now  see  from  another  point  of  view  how  it  is  that  as 
price  is  lowered  the  demand  increases.  All  the  purchasers 
willing  to  give  the  higher  price  are  retained  at  the  lower  price, 
and  a  certain  number  of  additional  ones  are  brought  in. 

45.  Graduated  Cost  of  Production.  It  has  been  shown 
that  if  the  net  cost  of  producing  a  commodity  exceeds  the  price 
it  will  command  in  the  market,  its  production  must  cease. 
Hence  the  price  asked  must  be  above  the  cost  of  production 
by  an  amount  sufficient  to  make  good  all  the  expenses  con- 
nected with  the  sale  in  the  market.  Since  whenever  the  price 
sufficiently  exceeds  the  cost  of  production  to  make  the  latter 
pay  well,  the  production  will  be  increased,  it  might  seem  to 
follow  that  the  selling  price  could  never  exceed  the  cost  of  pro- 
duction and  sale.  But  this  conclusion  does  not  follow  as  a 
matter  of  course,  because  it  rests  on  the  supposition  that  the 
cost  of  production  is  a  fixed  quantity,  and  that  the  amount  pro- 
duced can  be  increased  indefinitely  without  increasing  the  cost 
per  unit  of  the  commodity.  Were  there  no  limit  upon  the 
quantity  which  could  be  produced  at  the  lowest  net  cost,  this 
would  be  true.  But  we  have  shown  that  monopolized  elements 
enter,  to  a  greater  or  less  extent,  into  nearly  every  commodity. 
Since,  by  hypothesis,  these  elements  are  limited  in  supply,  and 
are  not  at  the  command  of  every  one,  the  effect  of  the  monop- 
oly will  be  with  every  addition  to  the  quantity  to  increase  the 
cost  of  each  unit  added. 

In  the  case  of  monopolies  of  the  raw  materials  of  production 
which  we  have  described  in  the  last  chapter,  the  general  rule 
is  this :  A  certain  limited  amount  of  the  raw  material  can  be 


III.  46.]      EQUILIBRIUM  OF  SUPPLY  AND  DEMAND.          265 

obtained  at  a  comparatively  low  net  cost  from  some  especially 
favored  sources.  If  this  quantity  does  not  suffice  for  the 
supply,  then  it  is  to  be  sought  for  from  less  and  less  favored 
sources,  and  thus  each  unit  will  cost  more.  This  is  the  mark 
of  a  graduated  monopoly  (§§  25,  27),  which  is  the  most  common 
kind  of  monopoly.  In  such  a  case,  the  quantity  made  to  sell  at 
a  price  P  is  all  that  can  be  made  at  a  net  cost  not  exceeding  P, 
just  as  the  quantity  sold  has  been  shown  to  be  all  that  could  be 
sold  at  a  price  not  below  P.  To  illustrate  this,  let  us  see  how 
it  may  be  with  the  production  of  iron. 

46.  There  may  be  in  certain  favored  spots  deposits  of  iron 
ore  so  rich  in  metal  and  so  near  the  surface  that  pig-iron  can 
be  made  from  them  at  a  net  cost  of  $7  per  ton.  From  other 
deposits  or  other  portions  of  the  same  deposit  the  cost  may  be 
$8  per  ton  ;  in  the  next  class  in  order  $9 ;  and  so  on  until  we 
reach  a  cost  above  any  limit  we  choose  to  set. 

Suppose  now  the  market  price  to  be  $9  per  ton.  It  is  evi- 
dent that  all  those  mines  from  which  the  iron  can  be  made  at 
a  net  cost  less  than  $9  will  pay  for  working  them.  If  the  price 
rises  to  $10  or  $12,  the  less  favorable  mines  will  be  sought  out 
and  opened.  If  it  falls  to  $8  or  $7,  the  less  favorable  fur- 
naces will  have  to  close,  temporarily  or  permanently.  The 
result  then  would  be : 

I.  The  higher  the  price  which  can  be  got  for  the  commodity 
the  greater  the  quantity  which  will  be  produced. 

II.  The  price  will  be  equal  to  the  cost  of  production  from 
the  least  favored  mines. 

We  shall  hereafter  see  that  the  second  rule  is  not  the  most 
general  one.  But  we  need  not  consider  the  exceptions  to  it  at 
present.  The  final  result  of  both  the  law  of  demand  and  the 
law  of  supply  is  that  the  price  will  be  so  fixed  that  supply  and 
demand  shall  be  equal.  To  show  how  the  point  of  equilibrium 
is  reached,  we  have  supposed  a  state  of  things  set  forth  in  the 
table  on  the  next  page. 

In  the  table  of  demand  the  first  column  is  a  series  of  prices 


THE  LAWS  OF  SUPPLY  AND  DEMAND.        [III.  46. 

per  ton  which  are  chosen  quite  at  pleasure,  and  from  which  we 
may  suppose  the  wholesale  dealers,  or  the  manufacturers,  to 
select  at  pleasure  in  order  to  try  the  effects  of  each  separate 
price  upon  sales  and  production. 

The  second  column  gives  the  corresponding  demand,  that  is, 
the  number  of  thousand  tons  which  it  would  be  possible  to  sell 
at  that  price  in  a  given  state  of  the  market  during  a  given 
period.  In  order  to  avoid  the  use  of  large  numbers  we  shall 
call  1000  tons  the  unit  of  quantity.  We  may  suppose,  to  fix 
the  ideas,  that  the  market  includes  the  whole  United  States,  and 
that  the  period  of  time  is  one  year.  The  first  two  columns 
then  indicate  that  50,000  tons  can  be  sold  in  a  year  at  $7  per 
ton,  48,000  at  $8,  and  so  on. 

In  the  table  of  supply  the  first  column  gives  a  series  of  the 
various  costs  of  production  per  ton. 


TABLE  OF  DEMAND. 

TABLE  OF  SUPPLY. 

Selling  Price. 

Demand 
in  Thousands  of 
Tons. 

Cost  of 
Production  per 
Ton. 

Quantity  which 
can  be  produced 
at  that  Cost. 

Total  at  Cost 
or  Lower. 

$7 

50 

$7 

10 

10 

8 

48 

8 

10 

20 

9 

46 

9 

12 

32 

10 

43 

10 

13 

45 

11 

40 

11 

15 

60 

12 

36 

12 

20 

80 

13 

83 

13 

20 

100 

14 

29 

14 

20 

120 

The  second  column  gives  the  quantity  which  we  may  sup- 
pose can  be  produced  at  each  particular  cost.  That  is,  we 
suppose  that  10,000  tons  can  be  produced  annually  from  those 
few  favored  mines  which  yield  the  product  at  $7  per  ton ; 
10,000  from  the  next  class,  at  $8  per  ton ;  and  so  on. 

The  third  column  shows  the  total  quantity  produced  at  each 
cost  or  at  less.  It  is  formed  by  adding  all  the  prices  beside 
and  above  it  in  the  preceding  column.  For  example,  $7  being 
the  lowest  price  of  all,  it  shows  all  that  can  be  produced  at  that 


III.  47.]        EQUILIBRIUM  OF  SUPPLY  AND  DEMAND.         267 

cost.  Opposite  $8  we  have  the  10  units  which  can  be  pro- 
duced at  the  cost  of  $8,  and  also  the  10  which  can  be  produced 
at  87,  making  a  sura  total  of  20,000  tons  at  $8  or  less.  12,000 
tons  can  be  produced  at  the  cost  of  $9,  which  added  to  the 
preceding  makes  32,000  tons  which  can  be  produced  at  the  rate 
of  $9  or  less;  and  so  to  the  end  of  the  table. 

Note  particularly  that  these  tables  show,  not  what  actually  is 
done,  but  what  can  be  done  under  certain  assumed  conditions, 
and  by  fixing  certain  arbitrary  prices  for  iron.  To  see  what 
actually  would  be  done,  suppose  the  selling  price  were  fixed 
at  $9  per  ton.  The  dealers  would  then  be  able  to  dispose  of 
their  stock  at  the  rate  of  46,000  tons  per  annum.  But  since 
they  could  not  afford  to  pay  the  full  price  at  which  they  sold, 
but  perhaps  10  cents  less,  the  producers  would  supply  them 
only  with  the  20  units  which  could  be  produced  at  a  cost  less 
than  $9  per  ton.  Buying  only  20  units  and  selling  46,  the 
stock  on  hand  would  diminish  at  the  rate  of  26  units  per  an- 
num, and  the  dealers  would  of  course  raise  the  price.  At  $10 
per  ton  they  would  sell  at  the  rate  of  43  units  per  annum. 
But  this  rise  of  $1  would  only  add  to  the  supply  the  12  units 
which  can  be  produced  at  $9  per  ton,  so  that  the  supply  would 
now  be  32  units  per  annum  and  the  equilibrium  would  not  yet 
be  restored.  At  $11  per  ton  the  sales  would  be  reduced  to  the 
rate  of  40  units  per  annum,  while  the  supply  would  be  45,  the 
13  units  which  can  be  produced  at  $10  per  ton  being  now 
added.  The  supply  would  then  slightly  exceed  the  demand,  so 
that  the  price  under  the  conditions  shown  by  the  tables  would 
be  between  $10  and  $11  per  ton. 

47.  Modifications.  This  is  an  example  of  the  law  of  equi- 
librium in  its  simplest  form.  By  comparing  it  with  the  actual 
case  the  student  will  readily  see  what  modifications  are  to  be 
made  in  it  to  correspond  to  what  actually  takes  place.  The  fol- 
lowing are  the  principal  modifications : 

I.  Neither  of  the  two  tables  is  to  be  considered  as  invari- 
able from  year  to  year.  The  demand  at  a  given  price  will  be 


268  WE  LAWS  OF  SUPPLY  AND  DEMAND.        [HI.  47. 


greater  in  some  seasons  than  in  others,  owing  to  the  greater  or 
less  want  of  iron  for  railways  or  manufacturing  purposes.  In 
one  year  46  units  might  be  salable  at  $8  per  ton,  as  supposed 
in  the  table,  while  in  another  year  the  sales  at  that  price  might 
be  50  units.  But  in  any  case  we  could  make  a  table  of  the 
same  kind  as  that  given  above  which  would  hold  good  until 
there  was  a  change  in  the  demand.  Every  three  months  or 
every  year  we  should  need  a  new  table. 

II.  The  cost  of  production  from  each  mine  may  vary  in 
the  same  way  with  variations  in  the  price  of  labor  and  the  cost 
of  machinery.     Moreover,  the  quantity  which  can  be  produced 
at  any  one  price  is  not  fixed  as  we  have  supposed  it,  because 
the  managers  of  the  furnaces  can  to  a  certain  extent  increase 
or  diminish  their  production  at  pleasure.     If  the  price  of  iron 
were  only  $7.50  per  ton,  the  most  favored  producer  would  have 
no  great  stimulus  to  manufacture  for  so  small  a  profit,  and 
therefore  might  make  less  than  ten  units  per  annum.     But 
when  the  price  went  up  to  $1%  per  ton  the  large  profit  would 
stimulate  him  to  enlarge  his  works  and  employ  more  labor,  so 
that  he  would  produce  at  the  rate  of  more  than  ten  units  per 
annum. 

On  the  other  hand,  this  tendency  is  checked  by  the  fact 
that  any  sudden  change  in  the  quantity  produced  is  disadvan- 
tageous. A  manager  would  rather  run  at  a  loss  for  a  short 
time  than  discharge  his  workmen,  and  when  the  prices  went 
up  he  might  be  unable  to  make  any  material  increase  of  pro- 
duction without  investing  additional  capital,  and  might  not  deem 
it  worth  while  to  make  this  additional  investment.  However 
these  two  opposing  causes  might  operate  against  each  other, 
the  result  would  be  in  any  case  a  relation  of  the  same  general 
character  as  that  shown  in  the  table.  We  therefore  need  a 
new  table  of  supply  as  well  as  of  demand  every  few  months  or 
every  year.  But  in  every  state  of  the  market  there  is  always 
a  possible  table  of  the  kind  shown  which  expresses  that  state. 

III.  Effect  of  Discounting  the  Market.     The  price  is  fixed 
by  the  dealers  and  producers,  not  merely  according  to  the 


III.  47.]     EQUILIBRIUM  OF  SUPPLY  AND  DEMAND.  269 

present  state  of  the  market,  but  its  probable  future  state  from 
the  best  information  they  can  get  or  the  best  judgment  they 
can  form.  If  they  foresee  that  next  year  a  great  number  of 
railways  will  be  built,  they  will  be  less  anxious  to  sell  now  and 
will  allow  stock  to  accumulate  on  their  hands  for  the  sake  of 
the  prospective  profit.  But  the  general  average  result  for  a 
whole  year  or  a  series  of  years  will  not  be  altered  (cf.  §  19). 

IV.  In  many  cases  there  may  be  no  dealers  at  all,  the  produ- 
cers of  the  pig-iron  selling  direct  to  the  manufacturers  who  use 
it.  But  this  does  not  change  the  relation  of  things  shown 
in  the  table.  The  functions  of  the  dealers  are  then  performed 
by  the  producers  themselves,  and  since  the  prices  are  publicly 
known,  the  laws  governing  them  are  the  same  as  when  dealers 
fix  them. 

Y.  The  modifications  in  the  tables  in  case  of  no  monopoly 
can  readily  be  made.  Suppose,  for  example,  we  could  make  a 
ton  of  pig-iron  at  a  cost  of  $9  in  labor,  capital,  and  supervision ; 
that  none  could  be  produced  at  a  less  cost,  and  that  any  required 
quantity  could  be  produced  at  that  cost.  The  selling  price 
would  then  be  between  $9  and  $10  no  matter  what  the  de- 
mand. The  only  exception  to  this  would  be  that  in  case  of  a 
sudden  increase  in  the  demand,  the  price  would  be  temporarily 
raised,  owing  to  the  difficulty  of  suddenly  increasing  the  supply 
to  correspond  to  the  new  state  of  the  market,  while  the  reverse 
would  be  true  when  the  demand  diminished. 

Suppose  next  that  the  quantity  were  an  insensitive  one  for 
which  the  demand  varied  very  little  from  43  units  per 
annum,  regardless  of  the  price.  The  result  would  be  that  the 
first  four  orders  of  mines  shown  in  the  tables  would  be  worked 
continually.  The  total  amount  produced  would  then  be 
45  units  per  annum ;  the  selling  price  would  be  between  $9 
and  $10  per  ton,  because  if  we  place  it  at  $9  or  less  the  fourth 
class  of  producers  would  drop  out,  and  the  demand  could  no 
longer  be  supplied.  On  the  other  hand,  if  the  price  exceeded 
$10  per  ton,  the  fifth  order  of  producers  would  enter  in  and 
the  total  production  would  be  GO  units  per  annum,  or  17 


270  TUB  LAWS  OF  SUPPLY  AND  DEMAND.        [III.  47. 

units  more  than  could  be  sold.  Since  it  would  be  impos- 
sible to  sell  the  entire  product,  some  one  would  have  to  stop, 
and  of  course  it  would  be  the  unwise  man  of  the  fifth  class. 

Combinations.  In  the  case  last  supposed  a  combination 
might  bo  made  between  the  five  classes  of  producers  to 
charge  $11.50  per  ton  and  thus  make  it  pay  for  the  fifth  man 
to  continue  the  manufacture.  But  unless  this  combination  in- 
cluded an  agreement  to  diminish  the  total  product  pro  rata, 
so  as  to  reduce  the  whole  amount  produced  to  the  43  units 
demanded,  there  would  be  a  continual  accumulation  on  the 
hands  of  the  producers.  The  first  four  orders  of  men  would 
soon  find  it  pay  better  to  "freeze  out"  number  five  by  lower- 
ing the  price  than  to  continue  the  combination. 

QUESTIONS. 

1.  If,  in  the  state  of  things  set  forth  in  the  table  of  §  46,  the  product 
should  be  sold  at  $10  per  ton  net,  what  would  be  the  profits  made  by  the 
four  orders  who  would  supply  the  demand? 

[$30,000,  $20,000,  $12,000,  zero.] 

2.  The  same  state  of  things  being  supposed,  if  all  the  producers  should 
combine,  set  the  price  at  $12  per  ton,  and  agree  that  the  five  orders  of  pro- 
ducers should  each  supply  the  same  quantity  of  iron,  what  profits  would 
they  respectively  make?  [$36,000,  $28,800,  etc.] 

8.  The  same  table  of  supply  holding  good,  let  the  demand  for  iron  so  in- 
crease that  double  the  quantity  could  be  sold  at  the  same  price;  that  is,  100 
units  at  $7,  96  units  at  $8,  etc.  What  would  be  the  price  and  supply  to 
produce  equilibrium?  [$12;  72,000  tons.] 

4.  From  the  amount  of  advertising  done  by  the  makers  of  quack  medi- 
cines, can  you  form  any  idea  of  the  relation  between  the  net  cost  of  produc- 
tion and  the  selling  price  of  their  nostrums? 

6.  Supposing  the  persons  who  use  quack  medicines  always  purchase  the 
medicine  recommended  by  the  druggist  who  sells  it,  what  effect  would  this 
habit  have  upon  the  druggist's  rate  of  profit,  upon  the  remuneration  of  his 
trade,  and  upon  the  number  of  persons  who  would  become  druggists? 

6.  There  is  free  competition  in  the  production  of  a  commodity  C,  but 
the  producers  have  no  facilities  for  selling  to  the  public,  and  so  have  to 
sell  to  a  particular  dealer,  who  can  charge  the  public  what  he  pleases.  How 
will  the  profits  be  divided  between  the  producers  and  this  dealer? 


III.  49.]     EQUILIBRIUM  OF  SUPPLY  AND  DEMAND.  271 


CHAPTER  IX. 

EQUILIBBIUM    BETWEEN    SUPPLY   AND    DEMAND    IN   THE   CASE   OF 
ABSOLUTE   MONOPOLIES. 

48.  LET  ns  briefly  review  our  mode  of  reasoning  in  the 
cases  heretofore  considered.     We  have  regarded  price  as  the 
determining  cause  fixing  the  amount  both  of  the  supply  and 
the  demand,  and  so  fixing  them  that  they  shall  be  equalized. 
The  general  rule  is  that  an  increase  of  price  not  only  dimin- 
ishes demand,  but,  as  shown  in  the  last  chapter,  stimulates  sup- 
ply, so  that  the  equilibrium  can  always  be  established  by  prop- 
erly adjusting  the  price.     In   showing  how  price  stimulates 
supply,  we  have  hitherto  considered  two  cases : 

1.  That  of  free  and  unlimited  competition  on  equal  terms,  in 
which  the  supply  can  always  be  increased  to  meet  any  demand 
that  may  arise,  without  any  increase  in  the  net  cost  of  produc- 
ing each  unit  of  the  commodity.    In  this  case  the  price  is  fixed 
by  the  net  cost  of  production. 

2.  That  of  a  graduated  monopoly,  in  which  there  is  a  large 
competition,  but  not  on  equal  terms,  the  favored  producers 
having  a  superior  command  of  some  form  of  skill  or  natural 
agents.     This  case  has  been  considered  in  the  last  chapter. 

We  have  now  to  consider  as  a  third  case  that  of  an  absolute 
monopoly,  held  by  one  or  a  limited  number  of  persons. 

49.  Let  us  first  suppose  that  a  single  individual  or  company 
has  the  exclusive  command  of  some  natural  requisite  of  produc- 
tion, a  mine  of  nickel  or  the  right  to  make  a  patented  machine. 
Then,  having  the  sole  command  of  the  market,  such  a  person  can 
fix  the  price  at  his  own  pleasure.    The  law  of  averages  will  not 
be  applicable,  nor  can  we  by  scientific  method  lay  down  an  abso- 
lute law  as  to  what  he  will  do.   He  may  say  he  wants  to  keep  the 


070  THE  LAWS  OF  SUPPLY  AND  DEMAND.        [111.49. 

mine  for  his  children,  or  to  bequeath  to  them  the  patent-right. 
But  although  we  cannot  lay  down  a  law  of  his  action,  we  may 
assume  that  he  will  do  what  is  most  for  his  own  interests ;  that 
is,  that  he  will  fix  such  a  price  as  will  in  the  long-run  yield  him 
the  largest  profit.  In  determining  what  will  be  the  largest 
profit  various  cases  arise.  If  the  quantity  of  the  monopolized 
requisite  is  absolutely  limited,  the  case  will  be  different  from 
that  of  a  patented  machine,  in  which  there  is  no  limit  to  the 
number  of  machines  that  the  patentee  may  make.  It  is  certain 
that  the  quantity  of  nickel  contained  in  the  earth  is  limited,  so 
that  by  no  efforts  can  more  than  a  certain  number  of  tons  ever 
be  produced.  This  fact  must  be  kept  in  view  by  the  owner, 
who  may  thus  be  led  to  confine  his  production  to  a  certain  defi- 
nite quantity  per  annum,  no  matter  how  high  the  price  may  rise. 
On  the  other  hand,  the  owner  of  the  patented  machine  has  a 
motive  for  making  as  many  machines  as  he  can,  subject  to  the 
condition  of  not  bringing  the  price  so  low  as  to  lessen  his 
profit. 

Next  imagine  that  instead  of  a  single  person  there  are  two. 
These  two  persons  may  combine  with  each  other  by  an  agree- 
ment not  to  sell  below  a  certain  fixed  price.  In  this  case  the 
result  will  be  the  same  as  if  they  were  a  single  person,  because 
the  two  are  acting  in  fact  as  a  single  economic  agent.  If  they 
compete,  that  course  will  tend  to  lower  the  price.  Whether  it 
will  reduce  the  price  to  such  a  point  that  the  monopoly  in  itself 
shall  become  valueless  depends  upon  the  quantity  demanded,  the 
price  which  the  consumers  are  willing  to  give,  and  the  net  cost 
of  supplying  it.  Suppose,  in  the  case  of  the  nickel  mine,  that 
each  miner  is  producing  regularly  at  the  rate  of  one  thousand 
kilograms  per  annum,  and  making  a  regular  profit  of  x  dol- 
lars. If  he  reduces  the  price,  the  demand  upon  him  will  be 
increased  in  two  ways.  The  total  amount  purchased  will  be 
increased  according  to  the  first  law  of  demand  and  price,  and 
he  will  also  attract  customers  from  his  rival.  Suppose  then 
that  his  rival  does  the  same  thing,  and  that  a  competition  is 
thus  established  as  to  who  sells  the  cheapest.  Will  the  result 


111.50.]     EQUILIBRIUM  OF  SUPPLY  AND  DEMAND.          273 

be  to  bring  the  price  to  the  lowest  paying  limit  ?  Not  at  all. 
Every  increase  in  the  supply  will  require  additional  laborers 
and  capita],  and  when  the  competing  parties  find  that  the  in- 
crease of  their  facilities  is  neutralized  by  the  lowering  of  the 
price,  neither  of  them  will  depress  the  price  any  further. 
Thus  the  two,  like  the  one,  may  be  expected  in  the  long-run 
to  fix  the  price  at  the  figure  which  yields  the  largest  profit. 

With  only  two  competitors  we  may  be  sure  that  no  competi- 
tion will  ever  last  long,  and  that  they  will,  either  tacitly  or  by 
common  agreement,  fix  a  scale  of  prices,  and  thus  act  as  if  they 
were  a  single  person.  The  greater  the  number  of  competitors, 
the  more  difficult  it  will  be  to  have  any  such  understanding  as 
to  price.  As  a  matter  of  fact,  however,  it  is  well  understood 
that  among  the  great  metal  manufacturers  of  the  country,  and 
indeed  among  nearly  all  those  who  produce  commodities  on  a 
large  scale,  attempts  are  made  from  time  to  time  to  establish 
agreements  either  about  price  or  quantities  produced.  It  is, 
however,  difficult  to  make  any  general  and  precise  statement 
on  this  subject,  because  the  state  of  the  case  is  constantly  chang- 
ing. Agreements  may  be  formal  or  informal,  and  each  party 
sometimes  adheres  to  them  and  sometimes  breaks  them.  New 
competitors  come  in  from  time  to  time,  and  thus  change  the 
basis  on  which  agreements  were  made.  One  thing  can,  how- 
ever, be  said  with  certainty.  The  great  staples  of  life  which 
are  really  necessary  to  human  advancement  and  welfare  are 
not  monopolized.  For  the  monopolized  articles  the  public  can- 
not be  compelled  to  give  more  than  they  are  willing  to  give, 
and  every  rise  of  prices  leads  to  less  of  the  article  being  sold. 
Fortunately  for  the  interests  of  mankind,  absolute  monopolies 
of  insensitive  products  are  quite  exceptional. 

5O.  The  most  common  case  of  an  absolute  monopoly  is  that 
of  patented  machines.  As  a  general  rule  these  machines  are 
things  that  people  can  readily  go  without,  or  find  substitutes 
for.  They  are  therefore  to  be  regarded  as  sensitive  commodities. 
To  illustrate  this,  let  us  suppose  that  it  is  possible  to  sell  in  a  cer- 
18 


274 


THE  LAWS  OF  SUPPLY  AND  DEMAND.        [HI.  50. 


tain  city  100  sewing-machines  of  a  certain  patent  at  the  price 
of  $40  each,  and  that,  for  every  dollar  above  $40  added  to  the 
price,  there  is  a  falling  off  of  five  machines  per  annum  in  the 
sales.  Then  at  the  price  of  $45  the  sales  would  fall  off  to  75, 
and  finally  at  the  price  of  $60  nobody  would  buy  the  machines. 
The  number  salable  at  each  price  is  shown  in  the  first  two 
columns  of  the  following  table  : 


Price. 

Demand. 

Total  Amount 
received. 

Cost. 

Profit. 

$40 

100 

$4000 

$3000 

$1000 

45 

75 

3375 

2250 

1125 

50 

50 

2500 

1500 

1000 

55 

25 

1375 

750 

625 

60 

0 

0 

The  patentees  can  fix  the  pi-ice  at  pleasure.  But,  in  accord- 
ance with  the  fundamental  law  of  human  nature  on  which 
economic  science  is  founded,  we  suppose  them  so  to  fix  it  that 
they  shall  receive  the  largest  income.  To  show  how  the  in- 
come derived  from  different  quantities  of  manufacture  may  be 
arrived  at,  let  us  suppose  the  cost  of  the  machines,  exclusive  of 
interest  upon  the  permanent  original  capital  invested,  to  be  $30 
each.  Then  if  the  selling  price  is  fixed  at  $40,  the  cost  of  the 
100  machines  which  can  be  sold  will  be  $3000,  as  shown  in  the 
fourth  column  of  the  table,  and  the  profits  will  be  $1000,  as 
shown  in  the  last  column.  If  the  price  is  raised  to  $15,  they 
can  sell  only  75  machines ;  the  cost  of  these  75  machines  being 
$2250,  the  profits  will  be  $1125.  If  they  put  the  selling  price 
•t  $50,  they  can  dispose  of  but  50  machines  annually.  The 
cost  of  these  machines  will  be  $1500,  and  the  profits  will  be 
$1000.  If  they  put  the  price  at  $55,  they  will  sell  but  25 
machines  annually,  which  will  cost  them  $750,  and  their  profits 
will  be  reduced  to  $625.  At  a  price  of  $60  they  will  sell  no 
machines  at  all,  and  therefore  can  do  no  business. 

To  correspond  to  the  actual  case  in  business  we  should  of 
course  make  allowance  for  the  cost  of  selling,  which  in  such 


HI.  51.]     EQUILIBRIUM  OF  SUPPLY  AND  DEMAND.  275 

cases  is  considerable.  If  this  cost  is  a  constant  premium  on 
every  machine  sold,  we  have  to  add  it  to  the  price  of  the  ma- 
chine. If  it  is  a  percentage  of  what  the  machine  sells  for,  we 
may  deduct  this  percentage  from  what  the  machine  sells  for  in 
the  first  column.  In  any  case  it  is  a  simple  matter  to  make 
the  necessary  changes  in  the  calculation,  and  we  need  not  de- 
scribe the  process,  because  our  object  is  to  show  the  principle 
involved,  which  will  best  be  seen  by  putting  the  case  in  the 
simplest  form  as  shown  in  the  table. 

Since  in  each  case  the  selling  price  must  depend  upon  the 
will  of  the  manufacturer,  we  cannot  lay  down  an  absolute  and 
necessary  law  about  it.  But,  for  reasons  already  dwelt  upon, 
the  price  concluded  by  the  political  economist  will  be  that 
which  secures  to  the  manufacturer  the  largest  profit ;  that  is, 
in  the  case  supposed,  it  would  be  $45. 

5 1 .  Case  in  which  the  Supply  is  absolutely  limited.  Not 
only  may  the  whole  supply  of  a  commodity  or  facility  be  in  the 
hands  of  one  or  a  few  persons  or  companies,  but  it  may  be 
incapable  of  increase  beyond  a  certain  definite  limit.  One  ex- 
ample of  this  case  is  that  of  an  ocean  telegraph  cable  without 
other  cables  to  compete  with  it.  Only  a  certain  number  of 
words  can  be  sent  over  the  cable  daily,  and  the  cost  will  not  be 
materially  diminished  by  any  diminution  in  the  number  sent. 
In  this  case  we  can  establish  a  normal  price  which  tends  most 
to  the  public  benefit,  but  which  may  not  be  the  price  most 
profitable  to  the  owners  of  the  cable.  Since  the  lower  the 
price  the  greater  the  number  of  messages,  a  price  may  be  estab- 
lished at  which  messages  enough  will  be  demanded  to  keep 
the  cable  constantly  employed.  This  may  be  called  the  normal 
price.  Let  ns  suppose  first  that  the  demand  for  sending  mes- 
sages is  comparatively  insensitive,  as  shown  in  the  table  on  the 
next  page. 

The  first  column  shows  the  price  per  word  taken  at  pleasure. 
Opposite  each  price  is  given  the  supposed  number  of  words 
which  senders  will  demand  to  be  sent  at  that  price  per  day ; 
the  last  column  shows  the  total  receipts. 


276  TUB  LAWS  OF  SUPPLY  AND  DEMAND.       [IIL  51. 


Price  per     Number  of  Words     Total  Dally 

Word,     demanded  per  Day.     Receipts. 

$3  40 

5,000 

$12,000 

2  20 

5,500 

12,100 

200 

6,000 

12,000 

80 

6,500 

11,700 

60 

7,000 

11,200 

40 

7,500 

10,500 

20 

8,000 

9,600 

00 

8,500 

8,500 

If  the  cable  can  send  words  without  limit,  the  most  profit- 
able price  per  word  would  be  about  $2.20,  at  which  price  about 
5500  words  would  be  demanded,  and  the  daily  receipts  would  be 
$12,100.  But  suppose  that  not  more  than  5000  words  can 
possibly  be  sent.  Then  it  would  be  most  profitable  to  send  this 
maximum  number  and  keep  the  cable  constantly  employed. 
The  price  leading  to  this  result  would  be  $2.40.  Suppose, 
however,  that  if  the  company  pleased  it  could  send  8000  words 
per  day  and  no  more.  Then  it  would  be  most  for  the  public 
benefit  to  fix  the  price  at  $1.20  per  word,  at  which  price  the 
cable  would  be  constantly  employed.  But  the  daily  receipts 
would  be  only  $9600. 

The  price  actually  charged  might  range  anywhere  between 
the  extremes  $1.20,  the  normal  price,  and  $2.30,  the  price  most 
remunerative  to  the  company.  If  the  company  is  chartered  by 
the  government  and  receives  favors  from  it,  the  normal  price 
is  that  which  should  be  fixed,  provided  the  company  is  willing 
to  lay  the  cable  on  that  condition. 

The  question  may  be  asked :  Suppose  the  company  can  make 
a  profit  by  sending  the  messages  at  $1,  or  even  80  cents,  per 
word  ;  would  it  not  be  better  for  the  public  to  fix  the  rate  at  this 
lower  price  ?  The  answer  of  the  economist  is,  No.  By  hypo- 
thesis, the  company  can  only  send  8000  words  per  day.  If  the 
price  is  fixed  at  80  cents,  people  will  be  coming  in  with  9000 
words  per  day,  so  that  there  will  be  1000  which  cannot  possibly 
be  sent.  In  this  case  a  selection  must  be  made.  On  what  prin- 
ciple shall  we  select  the  8000  which  are  to  be  sent  from  the 


III.  61.]     EQUILIBRIUM  OF  SUPPLY  AND  DEMAND.  277 

9000  demanded  ?  Clearly  the  answer  is  that  we  should  select 
the  8000  which  are  the  most  important.  But  how  shall  we 
determine  which  are  the  most  important  ?  Sentimentality  aside, 
there  is  but  one  possible  way.  The  most  important  messages 
are  those  for  which  the  senders  are  willing  to  pay  the  most. 
Hence  the  only  course  would  be  to  find  the  senders  of  those 
8000  words  who  are  willing  to  pay  the  price  of  $1.20  per  word. 
The  only  way  of  doing  this  is  to  charge  $1.20  and  to  let  the 
senders  of  the  1000  words  who  are  not  willing  to  pay  this  price 
give  way  to  the  others.  No  injustice  is  thus  done,  because  no 
one  need  pay  money  unless  the  service  is  worth  it,  and  it  is 
perfectly  right  that  those  persons  to  whom  the  service  is  worth 
less  than  $1.20  per  word  should  give  way  to  those  to  whom  it 
is  worth  more. 

Another  case  of  limited  supply  is  that  of  the  seats  at  theatres 
and  other  places  of  public  amusement.  There  are,  of  course, 
only  a  certain  definite  number  of  seats  at  such  places.  The 
price  of  tickets  may  be  so  low  that  more  people  will  demand 
them  than  can  be  supplied  with  seats,  and  they  may  be  so  high 
that  many  seats  will  be  left  empty.  The  normal  price  is  that 
at  which  the  demand  will  be  just  equal  to  the  number  of  seats, 
and  the  general  good  is  best  subserved  by  this  price.  But  this 
normal  price  will  vary  from  time  to  time  according  to  circum- 
stances, rising  higher  when  a  celebrated  actor  is  to  appear,  and 
falling  when  nothing  of  especial  interest  is  presented.  If  the 
price  be  put  much  below  the  normal  price,  the  tickets  will  be 
purchased  by  speculators  with  a  reasonable  probability  of  selling 
them  again  at  a  profitable  advance. 

The  professional  services  of  the  lawyer  or  physician  come 
under  the  same  category.  The  physician  can  properly  attend 
only  a  limited  number  of  cases.  If  his  fees  are  below  a  certain 
amount,  which  depends  upon  his  reputation,  the  demand  for 
his  services  will  be  greater  than  he  can  supply.  If  his  charges 
are  too  high,  lie  will  remain  a  greater  or  less  portion  of  the  day 
idle.  The  normal  price  is  that  at  which  the  demand  will  be 
equal  to  his  power  of  attending  patients. 


378  TI1B  LAWS  OF  sUppLT  AND  DEMAND.        [UI.58 

CHAPTEK  X. 

INTERNATIONAL   SUPPLY   AND   DEMAND. 

52.  THE  operations  of  international  supply  and  demand 
are  governed  by  the  same  general  principles  with  those  which 
govern  home  supply  and  demand.     The  differences  between 
the  productive  capacities  of  different  countries  are  of  the  same 
general  nature  as  between  different  iron  or  coal  mines.     There 
are,  however,  certain  modifications  in  the  application  of  these 
principles  of  which  the  following  is  the  one  chiefly  to  be  con- 
sidered.    In  domestic  trade  and  manufacture  laborers  can  pass 
from  one  establishment  to  another,  and  capital  can  pass  from 
one  employment  to  another,  with  comparative  freedom.     The 
various  machine-shops  and  railways  compete  with  eacli  other 
in  the  price  they  offer  for  goods  and  the  wages  they  offer  to 
their  employes.      We  may  thus  imagine  a  certain  level  or 
equilibrium  between  the  different  employments  in  a  country. 
Any  disturbance  of  this  equilibrium  will  very  soon  be  cor- 
rected.    Thus  each  country,  considered  separately,  will  enjoy 
this  equilibrium  within  its  own  limits. 

But  it  does  not  follow  that  the  equilibrium  will  hold  between 
different  countries.  There  is  no  competition  between  a  farm- 
hand in  China  and  one  in  the  United  States,  and  therefore  no 
tendency  to  an  equality  of  wages  between  them. 

53.  Let  us  now  suppose  a  number  of  countries  in  each  of 
which  an  industrial  organization  of  its  own  lias  grown  up,  but 
which  have  never  had  any  communication  with  each  other. 
To  make  this  supposed  case  merge  as  nearly  as  possible  into 
the  real  one,  we  shall  suppose  that  these  different  countries  all 
use  the  same  kind  of  money ;  which  money,  for  simplicity,  we 
may  call  gold.     Then  there  will  be  in  each  country  a  certain 
scale  of  prices  for  all  the  commodities  it  produces ;  and  this 


III.  53.]       INTERNATIONAL  SUPPLY  AND  DEMAND.  279 

scale  will  be  determined  in  each  case  by  the  laws  of  equilibrium 
between  supply  and  demand  which  have  already  been  laid 
down.  Suppose  now  that  some  two  of  these  countries  discover 
each  other,  and  that  free  communication  is  opened  up  between 
them.  Of  course  absolutely  free  communication  is  not  practi- 
cable, because  labor  is  required  to  transport  goods  across  the 
ocean  or  other  intervening  region.  For  the  sake  of  sim- 
plicity, however,  we  may  first  suppose  transportation  to  cost 
nothing.  To  begin  with  an  extreme  case,  let  it  be  found  that 
the  prices  in  gold  of  all  commodities  in  one  country  are  higher 
than  in  the  other.  The  country  of  higher  prices  will  then 
begin  by  making  all  its  purchases  from  the  cheaper  country, 
paying  for  them  in  gold.  The  result  will  be  a  scarcity  of  gold 
in  the  one  country  and  a  plenty  in  the  other.  This  will  result 
in  a  fall  of  prices  in  the  one  and  a  rise  in  the  other,  until  the 
two  scales  are  brought  into  approximation  (§  21). 

Of  course  the  general  inequality  of  prices  which  we  have 
just  supposed  is  something  which  never  exists  under  our  present 
arrangements ;  because,  as  a  matter  of  fact,  communication  be- 
tween countries  has  always  been  more  or  less  free,  and  thus 
no  general  inequality  between  the  scale  of  prices  in  different 
countries  has  ever  had  a  chance  to  exist.  In  other  words,  the 
equilibrium  to  which,  in  the  state  of  things  which  we  have  sup- 
posed, the  prices  would  ultimately  attain  is  that  to  which  they 
really  do  approximate,  so  far  at  least  as  concerns  those  goods 
which  pass  between  the  two  countries. 

The  question  now  is  where  the  excess  of  purchases  by  the 
dearer  country  would  stop.  "We  suppose  that  everybody  in 
each  country  buys  where  he  can  get  his  goods  the  cheapest. 
So  long  as  this  mode  of  buying  results  in  a  greater  value  of 
goods  being  conveyed  from  A  to  B  than  is  conveyed  in  the 
reverse  direction,  so  long  will  gold  to  pay  for  them  continue  to 
flow  out  of  B  into  A,  and  so  long  will  prices  continue  to  fall  in 
B  and  to  rise  in  A.  This  rise  and  fall  will  stop  as  soon  as 
equal  values  are  transported  in  each  direction  between  the  two 
countries. 


THE  LAWS  OF  SUPPLY  AND  DEMAND.        [III.  54. 

54.  Relative  Advantages  of  Different  Countries  in  Pro- 
duction. If,  when  an  equilibrium  is  reached,  the  price  of  each 
individual  commodity  is  the  same  in  the  two  countries,  all  trade 
between  them  will  cease,  because  there  will  be  no  inducement 
to  transport  goods  from  one  to  the  other.  The  prices  will  be 
equal  unless  one  country  has  a  relative  advantage  over  the  other 
in  the  production  of  special  commodities.  An  example  of  what 
is  meant  by  relative  advantage  is  this :  If  in  each  country  the 
cost  of  producing  ten  yards  of  cotton  is  the  same  as  that  of 
producing  one  bushel  of  wheat,  then,  no  matter  what  that 
cost  is,  neither  country  will  have  any  advantage  in  the  relative 
production  of  wheat  and  cotton.  It  may  cost  twice  as  much 
to  produce  both  the  wheat  and  the  cotton  in  one  country  that 
it  does  in  the  other,  but  in  this  case  the  advantage  is  an  abso- 
lute and  not  a  relative  one.  If  it  costs  just  twice  as  much 
labor  to  produce  each  separate  commodity  in  one  country  that  it 
did  in  the  other,  there  would  be  no  relative  advantage  between 
any  two  commodities,  and  therefore,  in  the  case  supposed, 
no  trade  between  the  countries.  Wages  of  all  kinds  would  be 
twice  as  high  in  the  more  favored  country,  but  this  would  not 
lead  to  any  trade  or  competition.  There  would  be,  indeed,  an 
inducement  to  emigrate  from  the  less  favored  country  to  the 
other,  which  tendency  would,  however,  execute  itself  with  com- 
parative slowness,  owing  to  the  indisposition  on  the  part  of 
men  to  change  their  country.  We  have  therefore,  in  our 
present  discussion,  nothing  to  do  with  the  general  advantage  of 
one  country  over  another  in  production,  but  only  with  its  rela- 
tive advantage  in  producing  one  commodity  rather  than  another. 

From  what  has  been  said  we  see  that  this  relative  advantage 
would,  in  the  case  of  free  trade  between  the  two  countries,  be 
indicated  not  only  by  the  relative  prices  of  different  commodi- 
ties, but  by  their  actual  prices.  If  wheat  is  cheaper  in  America 
than  in  England,  it  shows  that  we  have  a  relative  advantage  in 
producing  wheat  over  producing  the  common  ran  of  commodi- 
ties which  are  transported  between  the  two  countries  ;  while  if 
iron  is  cheaper  in  England,  it  shows  that  England  has  a  relative 


III.  55.]      INTERNATIONAL  SUPPLY  AND  DEMAND.  281 

advantage  in  the  production  of  iron.  But  this  fact  gives  us  no 
clue  to  the  rate  of  wages  in  the  two  countries,  which  may  differ 
to  any  extent  without  impairing  the  equilibrium  of  prices.  The 
exchanges  between  the  two  countries  show  that  America  has  a 
relative  advantage  over  England  in  the  production  of  bread- 
stuffs,  pork,  cattle,  cotton,  leather,  tobacco,  and  some  dairy  pro- 
ducts. England  has  a  relative  advantage  in  the  production  of 
spool-thread,  woollen  goods,  and  a  great  variety  of  manufac- 
tures of  small  articles  in  common  household  and  family  use. 
The  result  is  a  continual  flow  of  the  former  in  one  direction 
over  the  ocean,  and  of  the  latter  in  the  other  direction. 

55.  Balance  of  Trade  by  Foreign  Exchange.  In  a  former 
chapter  it  was  shown  how  international  trade  is  balanced  by  the 
use  of  foreign  exchange  on  the  part  of  bankers  (II.  95).  If  the 
value  of  our  imports  from  England  exceeds  that  of  our  exports 
to  that  country,  there  will  be,  as  already  shown,  a  demand  in 
the  New  York  market  for  exchange  on  London  in  excess  of 
the  supply.  In  accordance  with  the  common  law  of  supply 
and  demand,  the  New  York  bankers  will  then  raise  the  price 
of  exchange  on  London.  The  question  now  arises  to  what  limit 
the  price  may  rise.  The  answer  is  that  the  limit  is  determined 
by  the  fact  that  the  New  York  debtor  lias  always  the  privilege 
of  making  payment  by  sending  coin  across  the  Atlantic.  If 
then  the  premium  charged  by  the  bank  is  in  excess  of  the  cost 
of  freight  and  insurance,  coin  or  bullion  will  be  exported.  The 
ratio  between  the  amounts  of  metal  in  the  English  pound  and 
the  American  gold  dollar  are  such  that  the  bullion  value  of  the 
former  is  $4.86  65.  It  is  found  by  experience  that  when  the 
New  York  bankers  charge  a  higher  price  than  $4.90  for  ex- 
change on  London  our  merchants  begin  to  export  bullion.  Per- 
haps at  a  rate  one  cent  above  this,  all  payments  would  be  made 
in  bullion  and  no  foreign  exchange  would  be  bought.  The  gold 
will  flow  out  in  payment  until  the  fall  in  prices  consequent 
upon  the  outflow  stimulates  the  exportation  of  other  commod- 
ities than  gold,  and  then  the  balance  will  be  restored. 


THE  LAWS  OF  SUPPLY  AND  DEMAND.        [III.  55. 

Suppose,  on  the  other  hand,  that  our  exports  are  in  excess  of 
our  imports.  Then  the  merchants  in  New  York  who  possess 
credits  in  London  will  exceed  those  who  owe  debts  there. 
Thus  the  supply  of  foreign  exchange  by  the  former  will  exceed 
the  demands  of  the  latter,  and  the  bankers  will  find  exchange 
on  London  accumulating  on  their  hands.  In  accordance  with 
the  law  of  supply  and  demand,  they  will  lower  the  price  in 
order  to  stimulate  demand  and  discourage  the  supply.  The 
limit  will,  however,  be  reached  on  the  same  principle  as  in  the 
opposite  case.  Whenever  the  price  offered  by  the  banker  falls 
so  low  that  it  will  pay  the  New  York  creditor  better  to  ask  his 
London  debtor  to  send  coin  across  the  Atlantic  than  it  will  to 
sell  the  debt,  then  coin  will  begin  to  come.  This  limit  of  price 
ranges  from  $4.83  to  $4.84.  If  the  excess  of  imports  contin- 
ues, the  inflow  of  coin  will  result  in  an  increased  volume  of 
currency  on  this  side  of  the  Atlantic,  which  will  lead  to  a  rise 
in  prices  and  thus  stimulate  importations  from  abroad. 

Of  course  the  flow  of  gold  from  England  will  tend  to  make 
prices  low  there  and  thus  stimulate  exports  to  America. 
Thus  the  foreign  exchanges  both  of  gold  and  commodities 
always  tend  towards  an  equilibrium  which,  however,  is  con- 
tinually being  disturbed  through  the  action  of  changing  eco- 
nomic causes  in  each  country.  For  a  few  weeks  or  months 
there  will  be  an  excess  of  imports,  followed  by  a  corresponding 
demand  for  foreign  exchange  or  for  gold  to  send  abroad,  while 
at  other  times  the  state  of  things  is  the  opposite. 

The  one  condition  which  is  always  to  be  fulfilled  to  pro- 
duce equilibrium  is  that  equal  values  shall  pass  in  the  two 
directions.  It  does  not  follow  either  that  equal  weights  or 
equal  numbers  of  different  kinds  of  commodities  shall  pass. 
One  country  may  have  a  great  advantage  in  the  production  of 
a  single  commodity  and  no  more.  If  wheat  is  the  commodity 
which  we  can  produce  to  the  greatest  relative  advantage,  and 
if  the  quantity  which  we  can  produce  is  sufficient  to  buy  our 
whole  supply  of  those  foreign  commodities  in  the  production 
of  which  other  nations  have  a  relative  advantage,  then  we 

O     ' 


m.  56.]       INTERNATIONAL  SUPPLY  AND  DEMAND.  283 

should  export  nothing  but  wheat.  The  people  of  Switzerland, 
by  a  system  of  training  extending  through  many  generations, 
have  acquired  a  great  advantage  in  the  manufacture  of  watches. 
The  result  is  that  little  except  watches  is  exported  from  that 
country  in  exchange  for  many  kinds  of  products  imported. 

56.  Tax  and  Cost  of  Transportation.  In  the  preceding 
discussion  we  have  supposed  transportation  to  cost  nothing,  and 
trade  to  be  perfectly  free.  We  have  now  to  inquire  how  our 
conclusions  must  be  modified  when  we  allow  for  the  cost  of 
transportation  and  for  the  duties  which  have  to  be  paid  on  im- 
ports. As  a  result  of  this  cause  the  relative  prices  of  commodi- 
ties will  always  be  higher  in  the  country  to  which  they  are 
exported,  and  as  a  consequence  equal  values  according  to  the 
scale  of  prices  in  each  country  cannot  pass.  If,  for  example, 
the  imports  into  New  York  should  equal  the  exports  in  value, 
then  it  is  certain  that  those  imports  are  worth  less  when  they 
leave  England  than  when  they  are  landed  in  New  York.  And 
because  the  exports  are  worth  more  when  they  reach  England, 
it  follows  that,  as  measured  in  England,  the  value  of  the  im- 
ports would  be  in  excess.  How  then  is  the  equilibrium  to  be 
defined? 

To  answer  this  question,  let  us  suppose  that  both  exports 
and  imports  are  carried  in  foreign  ships  to  and  from  the  port 
of  New  York.  Then  in  order  that  the  accounts  of  the  New 
York  merchants  with  other  foreign  correspondents  may  be  ac- 
curately balanced,  it  is  necessary  that  the  value  of  the  goods 
as  received  from  the  ship  shall  equal  the  value  of  those  ex- 
ported, at  the  price  paid  in  New  York  by  the  London  purchaser 
of  the  exports.  Let  us  call  this  equal  quantity  P.  Then  when 
this  value  P  of  exports  reaches  London  it  will  be  valued  at  a 
higher  price,  the  addition  being  represented  by  all  the  cost  of 
transportation,  insurance,  and  interest  on  capital.  If  this  cost 
be  D,  the  value  delivered  in  London  will  be  P  -f-  D.  If  the 
cost  of  sending  the  goods  back  from  London  in  payment  be 
H,  then  it  is  only  necessary  to  send  the  value  P  —  II  from 


284  TUB  LAWS  OF  SUPPLY  AND  DEMAND.        [III.  57. 

London  in  order  to  make  the  value  P  in  New  York.  Thus  as 
measured  in  London  the  value  of  the  imports  will  exceed  that 
of  the  exports  by  D  +  H.  This  quantity  D  +  II  will  represent 
the  total  cost  to  the  English  shipper  of  carrying  the  goods  in 
both  directions,  including  all  profits  upon  the  transaction.  If 
the  cost  of  transportation  were  entirely  incurred  by  the  New 
York  dealers,  the  result  would  be  that  to  balance  the  account 
the  exports  and  imports  should  be  equal  as  valued  in  England, 
while  the  imports  would  be  in  excess  as  valued  in  New  York. 
It  is  therefore  practically  impossible  to  strike  a  mathematically 
exact  balance  in  the  case.  In  theory,  however,  the  balance  is 
obtained  by  subtracting  from  the  price  of  the  imports  the  sums 
paid  by  the  importer  for  the  cost  of  transportation,  and  adding 
to  the  cost  of  exports  whatever  he  pays  towards  transporting 
them.  Modifying  the  sides  of  the  account  in  this  way,  the 
exports  and  imports  should  balance  on  both  sides,  provided  no 
gold  is  to  be  transported  in  either  direction. 

57.  We  thus  reach  a  very  simple  theorem  concerning  the 
balance  of  foreign  trade.  Since  the  excess  of  imports  into 
each  country  must  be  paid  for  in  coin,  it  follows  that  if  we 
include  the  value  of  the  coin  or  bullion  paid  with  that  of  the 
exports,  and  if  we  include  coin  and  bullion  among  the  imports, 
then  the  sum  total  of  imports  and  exports  must  in  the  long-run 
balance  each  other.  This  qualification  "in  the  long-run"  is  im- 
portant, because  there  is  no  necessity  that  the  balance  should 
be  struck  every  day  or  every  month,  or  even  every  year.  A 
nation  may  go  on  for  some  time  increasing  its  debts  abroad 
simply  by  the  home  merchants  deferring  payment.  Thus  there 
is  always  a  fluctuating  mass  of  indebtedness  from  the  merchants 
of  one  country  to  those  of  another  which  may  sometimes  go 
on  increasing  for  years.  As  a  general  rule,  however,  this  in- 
debtedness does  not  increase  indefinitely,  but  is  being  paid  off 
from  time  to  time.  If  it  has  grown  in  one  year,  it  probably 
will  diminish  in  the  year  following. 

Of  course  the  supply  and  demand  for  foreign  exchange  cor- 


in.  58.]      INTERNATIONAL  SUPPLY  AND  DEMAND.  285 

responds  to  the  payment  of  indebtedness  on  the  two  sides,  and 
not  to  its  being  incurred.  That  is  to  say,  a  New  York  im- 
porter does  not  demand  foreign  exchange  when  he  becomes  in- 
debted to  his  London  correspondent,  but  when  he  has  to  pay 
that  indebtedness. 

58.  Although  the  preceding  theory  is  exact  when  we  make 
all  due  modifications  in  its  application,  yet  the  student  must 
be  warned  against  supposing  that  any  official  statement  of  the 
total  values  of  imports  and  exports  will  accurately  represent 
the  theory.  The  precise  value  of  goods  is  always  indefinite, 
and  becomes  necessarily  greater  with  every  step  the  goods  take 
towards  their  destination.  A  bale  of  cotton  is  worth  more  on 
board  a  ship  in  Charleston  harbor  than  it  was  on  the  wharf. 
And  a  bale  of  broadcloth,  when  brought  to  New  York,  is 
worth  more  after  being  landed  on  the  wharf  than  while  it  was 
in  the  ship.  The  prices  of  goods  also  fluctuate  from  day  to 
day,  and  it  would  be  impossible  to  formulate  any  system  which 
would  be  exact  from  an  economical  point  of  view,  without  an 
examination  of  every  merchant's  ledger  to  find  what  all  his  im- 
ports actually  cost  him  in  every  way.  For  this  reason  statisti- 
cal tables  of  the  values  of  imports  and  exports  are  not  to  be 
regarded  as  mathematically  exact,  but  only  as  rude  approxi- 
mations to  the  actual  values. 

In  the  case  of  gold  and  silver  bullion,  however,  the  num- 
bers may  be  regarded  as  sufficiently  exact  for  all  practical  pur- 
poses, and  they  afford  the  best  test  of  the  actual  balance  of 
trade.  If  during  a  series  of  years  we  find  that  more  gold  is 
exported  from  any  country  than  is  imported,  we  may  conclude 
that  there  is  a  corresponding  excess  to  the  home  value  of  im- 
ports of  other  goods,  and  vice  versa.  But  even  in  this  case  the 
completeness  of  the  tables  is  always  open  to  challenge.  Coin 
and  bullion  may  be  imported  by  passengers  arriving  from 
abroad  without  being  reported  to  the  authorities,  and  the  prin- 
ciples of  economics  may  settle  the  question  of  the  balance  of 
trade  better  than  statistics. 


THE  LAWS  OF  SUPPLY  AND  DEMAND.        [III.  60. 

59.  Total  Balance  of  Trade  with  all  Countries.     Hitherto 
we  havo  considered  interchange  between  two  countries  only. 
But  it  does  not  at  all  follow  that  the  value  of  our  imports  from 
any  one  country  must  equal  that  of  the  goods  which  we  re- 
turn to  it.     During  the  year  1883-4,  for  example,  our  imports 
from  Brazil  were  50  millions  of  dollars,  while  our  exports  to 
Brazil  were  only  9  millions.     Our  trade  with  France,  Austria, 
and  the  East  Indies  and  many  other  countries  shows  an  excess 
of  the  same  kind.     On  the  other  hand,  our  imports  from  Great 
Britain  were  163  millions,  and  our  exports  to  that  country  were 
386  millions.     This,  however,  forms  no  exception  to  the  rule 
when  we  extend  the  latter  to  include  sums  total.     Our  total 
imports  from  all  countries  were  valued  at  668  millions,  and  our 
total  exports  at  740  millions.    This  difference  is  partly  to  be  at- 
tributed to  the  defects  of  the  official  system  of  valuation,  partly 
to  the  indebtedness  incurred  by  foreigners  to  our  merchants, 
and  partly  to  the  profits  gained  by  the  latter  through  the  ex- 
change.   The  inequalities  in  the  relations  of  the  different  coun- 
tries are  accounted  for  by  England  paying  Brazil  and  France 
for  what  they  export  from  those  countries,  and  charging  it 
against  the  value  of  what  she  receives  from  us.     The  case  is 
exactly  the  same  as  between  individuals.     If  A  purchases  from 
B,  B  from  C,  and  C  from  A,  and  the  values  are  equal,   the 
commodities  are  paid  for  by  simply  cancelling  the  accounts 
without  any  money  passing  between  the  parties.     The  opera- 
tion is,  in  principle,  identical  with  the  balancing  of  bank  in- 
debtedness at  a  clearing-house  (II.  92). 

60.  Theories  and  Nomenclature  of  the  Balance  of  Trade. 
When  it  is  found  that  the  total  value  of  the  goods  imported 
into  a  country  exceeds  the  total  value  of  those  which  it  ex- 
ports in  exchange,  the  balance  of  trade  is  said  to  be  against  that 
country.     This  form  of  expression   may  surprise  the  young 
economist,  since  it  implies  that  a  nation  is  more  favorably 
situated  the  greater  the  value  of  the  goods  which  it  sends 
abroad  and  the  less  the  value  which  it  receives  in  payment. 


III.  60.]       INTERNATIONAL  SUPPLY  AND  DEMAND.  287 

It  is  a  relic  of  the  old  "  mercantile  system"  of  two  centuries 
ago,  and  is  based  on  two  principles  then  in  vogue. 

The  first  of  these  principles  was  that  a  nation  was  rich  in 
proportion  to  the  amount  of  gold  and  silver  which  it  possessed. 
Accordingly,  the  policy  of  the  leading  mercantile  countries  was 
shaped  by  a  constant  effort  to  get  as  much  of  these  metals  as 
possible  into  the  country,  and  to  prevent  them  from  leaving  it. 
Since,  as  just  shown,  the  metals  would  be  received  in  payment 
for  any  excess  of  exports  over  imports,  it  was  considered  that 
an  excess  of  exports  encouraged  the  importation  of  money, 
while  the  opposite  state  of  things  implied  its  exportation. 

The  second  principle  was  that  a  nation  was  impoverished  in 
proportion  to  the  amount  of  labor  expended  on  any  imported 
product  by  the  foreign  producer.  For  example,  when  it  was 
found  that  a  product  which  only  cost  an  English  manufacturer 
one  day's  labor  could  be  sold  in  Portugal  for  two  or  three  days' 
labor  of  a  Portuguese,  it  was  held  that  the  exchange  was  dis- 
advantageous to  England.  This  principle  combined  its  force 
with  the  other  in  leading  governments  to  look  unfavorably  on 
an  excess  in  the  value  of  their  imports. 

At  the  present  time  the  expression  "favorable  balance  of 
trade"  implies  to  those  who  use  it  an  increasing  indebtedness 
from  foreign  countries.  It  is  not  a  good  thing  to  be  in  debt, 
but  it  is  supposed  to  be  a  good  thing  to  have  others  indebted 
to  us.  Statesmen  like  to  see  our  exports  exceed  our  imports, 
because  that  seems  to  imply  either  that  our  indebtedness  is 
being  paid  off,  or  that  foreigners  are  running  in  debt  to  us. 
Since,  however,  this  indebtedness  is  not  public,  but  private,  the 
parties  can  be  safely  left  to  take  care  of  it  for  themselves. 

In  the  long-run  the  relation  of  the  export  to  the  import  of 
the  precious  metals  to  and  from  any  country  must  depend  on 
whether  that  country  is  a  large  producer  of  them.  A  consid- 
erable part  of  the  annual  gold-supply  of  the  world  comes  from 
California  and  Australia.  These  countries  may  therefore  in 
the  long-run  be  supposed  to  export  more  gold  than  they  im- 
port, because  the  supply  tends  to  diffuse  itself  over  the  world 
in  proportion  to  the  needs  of  different  countries. 


TUB  LAWS  OF  SUPPLY  AND  DEMAND.        [III.  61. 

61.  Advantages  of  International  Trade.  The  advantages 
of  international  trade  are  that  the  people  of  each  country  have 
a  larger  field  from  which  to  supply  their  wants  than  they  would 
have  were  they  to  depend  entirely  upon  their  own  resources. 
If  all  countries  were  alike  in  their  productive  capacities,  no  in- 
ternational trade  would  arise.  The  inequalities  which  give 
rise  to  trade  are  both  natural  and  artificial.  In  trade,  countries 
share  these  advantages  with  each  other.  For  example,  it  is 
found  that  there  are  certain  kinds  of  foreign  wool  which  when 
mixed  with  American  wool  will  make  a  far  better  cloth  than 
the  latter  will  make  alone.  By  importing  this  wool  we  make 
our  own  more  valuable.  It  is  also  found  in  metallurgy  that 
there  are  certain  foreign  ores  the  addition  of  which  to  our  own 
greatly  facilitates  the  process  of  manufacture.  Our  metal- 
lurgists therefore  seek  for  these  foreign  commodities.  Nearly 
all  the  platinum  of  the  world  is  found  in  or  around  the  Ural 
Mountains.  If  it  could  not  be  exported,  no  other  nation  than 
Russia  would  have  the  use  of  it. 

The  principle  is  the  same  in  the  case  of  artificial  powers  or 
products.  Our  inventors  have  by  peculiar  skill  and  applica- 
tion brought  the  sewing-machine  to  great  perfection.  With- 
out foreign  trade  the  advantage  of  the  skill  that  they  have  ac- 
quired in  making  these  instruments  would  be  enjoyed  only  by 
ourselves.  But  by  exporting  these  machines  other  nations 
share  these  benefits  with  us.  Our  cotton  helps  to  clothe  the 
whole  world,  and  our  breadstuffs  to  feed  large  portions  of  it. 
In  return  for  this  we  get  the  benefit  of  any  peculiar  skill  that 
may  be  acquired  by  the  inhabitants  of  any  other  countries. 
The  products  of  Chinese  and  Japanese  art  are  found  in  many  of 
our  houses.  The  skill  acquired  by  the  English  manufacturer 
of  cloth  is  available  to  clothe  us.  The  mere  fact  that  a  country 
is  less  rich  in  natural  wealth  than  another  may  make  its  services 
available.  No  civilized  country  is  so  poor  that  it  cannot  in 
some  way  assist  us  in  supplying  our  wants.  As  the  poorest 
classes  among  us  can  perform  menial  services  for  us  more  ad- 
vantageously than  we  can  perform  them  for  ourselves,  so  the 


in.  61.]      INTERNATIONAL  SUPPLY  AND  DEMAND.  289 

inhabitants  of  countries  less  fortunately  situated  than  our  own 
are  ready  to  supply  us  with  many  commodities  more  cheaply 
than  we  can  afford  to  make  them  for  ourselves.  As  some 
people  are  so  wealthy  as  to  command  nearly  everything  they 
want  without  irksome  labor,  so  we  might  imagine  a  country 
so  rich  in  natural  wealth  as  to  have  most  of  its  wants  requiring 
disagreeable  labor  supplied  by  its  neighbors.  In  a  word,  the 
social  organism  does  not  comprise  the  people  of  one  country 
alone,  but  of  the  whole  civilized  world,  who  are  all  engaged  in 
supplying  each  other's  wants. 

ILLUSTRATIONS  AND  EXERCISES. 

1.  Investigate  the  effect  of  the  following  causes  upon  the  price  of  ex- 
change on  London  in  the  city  of  New  York,  showing  in  each  case  whether 
the  effect  will  be  to  make  exchange  dear  or  cheap  for  the  time: 

1.  During  a  period  of  one  year  American  merchants  import  more  goods 
from  England  than  they  export,  but  run  in  debt  for  the  excess. 

II.  During  the  year  following  they  pay  off  this  indebtedness. 

III.  Owing  to  the  rate  of  interest  being  higher  than  in  Europe,  London 
capitalists  invest  in  American  securities. 

IV.  Owing  to  the  rate  of  interest  being  higher  in  London,  American  in- 
vestors purchase  British  securities. 

V.  A  war  in  Europe  leads  the  contending  parties  to  purchase  large  sup- 
plies  of  food,  military  accoutrements,  and  weapons  from  the  United  States. 

IV.  In  consequence  of  goods  being  dearer  in  Europe  than  in  America  the 
exports  from  America  largely  exceed  the  imports. 

VII.  The  quantity  of  gold  mined  in  America  is  in  excess  of  our  own 
wants,  and  is  therefore  regularly  exported  to  London. 

VIII.  The  mining  of  gold  and  silver  diminishes  so  that  we  have  to  im- 
port bullion  from  London. 

2.  Consider  the  great  difference  between  the  natural  advantages  of  differ- 
ent countries  for  the  production  of  the  great  staples  of  life.     Name  several 
such  staples  which  can  be  produced  advantageously  only  in  certain  coun- 
tries.    Also  name,  so  far  as  you  can,  those  commodities  which  can  be  pro- 
duced  as  well  in  one  place  as  in  another.    Then  show  in  what  countries 
will  people  most  devote  themselves  to  the  production  of  this  last  class  of 
commodities,  and  illustrate  your  theory  by  such  instances  as  you  are  ac- 
quainted with.     Can  you  thus  explain  the  fact  that  there  are  many  com- 
modities which  will  not  be  made  at  all  in  the  United  States,  unless  their 
importation  from  abroad  is  impeded  by  a  protective  tariff  ? 

19 


TUE  LAWS  OF  SUPPLY  AND  DEMAND.        [III.  63. 


CHAPTER  XL 

EFFECT  OF  TAXES   ON   PRODUCTION   UPON    SUPPLY,   DEMAND,    AND 
INTERNATIONAL    TRADE. 

62.  THE  general   policy  of   different  forms  of    taxation, 
that  is,  the  consideration  of  the  effect  of  taxes  upon  the  in- 
terests of  society,  belongs  to  the  application  rather  than  to  the 
theory  of  economics.     At  the  same  time,  a  tax  levied  by  gov- 
ernment is  an  economical  cause,  the  effects  of  which  are  to  be 
investigated  by  the  same  methods  that  we  employ  in  the  inves- 
tigation of  other  causes.     The  consideration  of  taxes  is  there- 
fore a  legitimate  branch  of  pure  economics,  which  we  shall 
now  enter  upon  so  far  as  necessary  for  the  purpose  of  round- 
ing out  the  subject. 

The  only  taxes  which  we  need  consider  for  the  present  pur- 
pose are  those  levied  upon  production;  that  is,  the  taxes  which 
a  producer  may  be  obliged  to  pay  as  a  consequence  of  having 
added  to  wealth.  Since  transportation  is  an  act  of  produc- 
tion, it  follows  that  import  duties  are  to  be  included  in  our 
list.  As  a  matter  of  fact,  import  duties  are  the  only  taxes 
npon  production  which  are  at  all  popular.  But  most  govern- 
ments are  obliged  also  to  levy  taxes  upon  particular  home 
products,  especially  alcoholic  liquors  and  tobacco.  All  such 
taxes  produce  their  effect  through  the  laws  of  supply  and 
demand,  and  the  method  of  investigation  is  the  same  in  all. 

63.  To  begin  with  a  simple  case,  let  us  suppose  that  a 
country  has,  up  to  a  certain  point,  had  no  occasion  to  levy  a 
tax  upon  tobacco.     A  necessity  for   increasing  the  revenue 
arises,  and  the  government  determines  to  levy  a  tax  on  all  to- 
bacco produced.    Let  this  tax  be  fixed  by  a  percentage  of  the 
valne  of  the  tobacco,  and,  for  convenience,  let  us  suppose  it  to 
be  payable  when  the  tobacco  is  produced. 


III.  64.]  EFFECT  OF  TAXES  ON  PRODUCTION.  291 

Now,  the  first  conclusion  we  draw  is  that  the  immediate 
economic  effect  of  the  tax  is  the  same  as  that  of  an  increase 
in  the  cost  of  producing  tobacco.  For,  so  far  as  the  producer 
of  tobacco  is  concerned,  it  makes  no  difference  to  him  whether 
the  money  which  he  pays  goes  as  tax  to  the  government,  or  to 
some  land-owner  or  laborer  who  helps  him  in  his  work.  In 
both  cases  it  is  a  sum  which  he  has  to  pay  out  as  a  condition 
of  producing,  and  is  therefore  regarded  by  him  as  an  addition 
to  the  cost  of  production.  The  question  now  is,  What  change 
will  this  tax  produce  in  the  supply  and  the  demand  ?  The  first 
factor  in  the  case  will  be  the  producer,  with  whom  therefore 
we  commence  to  trace  out  the  effect. 

It  is  certain  that  the  first  thing  that  the  producer  will  at- 
tempt will  be  to  add  the  tax  to  the  price  at  which  he  sells  his 
tobacco.  This  addition  must  be  made  by  all  through  whose 
hands  the  article  passes,  and  thus  the  consumer  of  tobacco  will 
find  an  attempt  to  charge  him  a  higher  price  for  it.  Now 
two  cases  may  occur,  depending  on  whether  tobacco  is  or  is 
not  an  insensitive  commodity. 

If  tobacco  is  an  insensitive  commodity  (§  15),  that  is  to  say, 
if  the  consumer  will  buy  as  much  at  the  higher  price  as  he 
formerly  bought  at  the  lower  price,  then  no  further  change 
will  occur  in  the  conditions.  The  manufacturer  and  seller  of 
the  tobacco,  finding  this  same  demand  under  the  increased  price 
as  they  did  before  the  tax  was  levied,  will  go  on  manufacturing 
the  same  quantity  as  before,  and  will  make  the  same  net  profits. 
"We  may  therefore  lay  down  the  law : 

A  tax  upon  an  entirely  insensitive  product  is  wholly  paid 
ly  the  consumer,  no  matter  what  the  conditions  of  production. 

64.  But  the  case  of  an  absolutely  insensitive  product  is  an 
extreme  one,  which  we  can  hardly  consider  to  have  an  actual 
occurrence.  It  is  certain  that  some  people  will  economize  in 
the  use  of  tobacco  or  any  other  product  when  the  price  is  high. 
Then  when  the  seller  finds  the  amount  demanded  to  fall  off 
in  consequence  of  the  increased  price,  we  have  a  cause  which 


THE  LAWS  OF  SUPPLY  AND  DEMAND.        [III.  65. 

we  must  trace  back  to  the  producer.  The  consumer  buying 
loss,  the  producer  finds  that  he  cannot  sell  the  same  amount  as 
before.  He  must  therefore  do  one  of  two  things:  (1)  di- 
minish his  production,  or  (2)  lower  his  price,  thus  taking  a  part 
of  the  tax  upon  himself.  "Which  course  he  will  take  depends 
upon  the  conditions  under  which  he  produces,  and  especially 
upon  whether  monopolized  elements  enter  into  the  production. 

If  there  is  no  monopoly,  then  it  is  to  be  assumed  that,  before 
the  taxes  were  levied,  the  competition  of  producers  had  resulted 
in  the  tobacco  being  sold  at  the  lowest  price  which  would 
induce  any  person  to  engage  in  its  production.  This  being 
the  case,  the  producers  could  not  all  afford  to  go  on  producing 
as  before,  and  still  pay  a  part  of  the  tax.  There  must  there- 
fore be  a  diminution,  those  least  able  to  bear  the  additional 
burden  going  out  of  business,  and  the  others  diminishing  their 
production.  This  diminution  must,  in  the  case  supposed,  go 
on  until  the  rise  in  prices  caused  by  the  increased  scarcity  be- 
comes nearly  equal  to  the  tax.  We  have  therefore  as  a  second 
law: 

The  tax  levied  upon  a  commodity  into  which  no  monopolised 
elements  enter  is  entirely  paid  by  the  consumer. 

65.  Suppose  next  that  a  monopolized  element  does  enter ; 
for  example,  that  certain  soils  are  much  better  adapted  to  rais- 
ing tobacco  than  to  any  other  purpose,  and  would  command  a 
much  higher  rental  than  they  would  if  the  production  of  to- 
bacco were  stopped.  If  the  cultivators  of  such  soils  leave  off 
raising  tobacco,  they  will  be  subject  to  a  greater  or  less  loss  of 
income.  Therefore  rather  than  do  so  they  will  lower  the  price ; 
that  is,  they  will  pay  a  portion  of  the  tax  themselves.  To  cor- 
respond to  the  actual  case  we  must  suppose  a  graduated  monop- 
oly, some  soils  having  no  special  advantage  in  raising  tobacco, 
and  others  having  a  great  advantage.  The  former  will  now  be 
devoted  to  the  cultivation  of  some  other  product  when  the  tax 
is  levied,  while  the  owners  of  the  latter  will  pay  a  portion  of 
the  tax.  We  therefore  reach  the  conclusion  : 


III.  67.]  EFFECT  OF  TAXES  ON  PRODUCTION.  293 

A  tax  upon  a  sensitive  commodity  into  which  monopolized 
elements  enter  is  divided  between  the  producer  and  the  con- 
sumer. 

66.  A  fourth  case  may  be  considered  possible,  namely,  that 
in  which  a  consumer  will  not  pay  any  increase  of  price  whatever. 
Let  us  then  suppose  that,  from  any  cause,  when  the  seller  of 
tobacco  raises  the  price,  he  finds  that  his  customers  will  not 
buy  any  at  all,  and  that  he  must  either  continue  to  sell  at  the 
old  price  or  go  out  of  business.     The  knowledge  of  this  fact 
will  go  back  through  the  channels  of  trade  to  the  producer, 
who  must  then  take  his  chance  of  selling  at  the  same  price 
as  before  or  giving  up  production.     If  he  can  better  afford  to 
pay  the  whole  tax  than  to  go  into  some  other  business,  he  will 
do  so.     If  he  cannot,  he  must  stop  producing  tobacco  entirely. 
Hence  we  have  a  fourth  law: 

If  a  commodity  cannot  be  sold  at  all  above  a  certain  price, 
a  tax  upon  it  must  be  paid  entirely  by  the  producer. 

This  case  can  hardly  arise  unless  a  commodity  is  very  sensi- 
tive in  consequence  of  some  substitute  for  it  being  readily  ob- 
tainable. Then  if  this  substitute  is  untaxed,  the  effect  of  the 
tax  may  be  to  stop  the  production  of  the  taxed  commodity 
entirely. 

67.  Taxes  on  International  Trade.     If  an  import  duty  be 
levied,  the  home  and  foreign  production  of  the  article  imported 
will  be  changed  in  accordance  with   laws  founded  on  those 
first  principles  which  have  just  been  enunciated.     A  much 
greater  complexity  of  circumstances  may,  however,  enter,  de- 
pending upon  the  variety  of  sources  from  which  both  the 
foreign  and  domestic  supply  of  the  commodity  may  be  ob- 
tained.    In  domestic  taxation  we  had  to  consider  only  a  single 
class  of  producers,  or  at  most  a  single  graduation  of  the  monop- 
oly.    But  most  largely  imported  products  may  be  obtained  from 
several  countries,  where  they  are  produced  under  very  different 
conditions ;  we  must  therefore  see  how  the  preceding  principles 


THE  LAWS  OF  SUPPLY  AND  DEMAND.        [III.  68. 

will  apply  to  these  various  conditions  which  may  be  found  to 
exist.  If  there  were  a  commodity  C  which  could  be  produced 
only  in  England,  and  which  none  but  Americans  consumed, 
then  an  import  duty  levied  by  America  upon  C  would  either 
be  paid  wholly  by  American  consumers,  or  divided  between  the 
American  consumer  and  the  British  producer  in  exact  accord- 
ance with  the  laws  already  laid  down.  That  is,  the  tax  on  an 
insensitive  product,  or  on  a  product  of  which  no  producer  in 
England  had  any  monopoly,  would  be  paid  entirely  by  the 
American  consumers.  As  the  product,  on  the  one  hand,  became 
sensitive,  or,  on  the  other  hand,  as  the  production  was  monopo- 
lized, the  British  producer  would  have  to  lower  his  price  in 
order  to  induce  the  Americans  to  continue  their  importation. 
This  simple  case  is,  however,  an  extreme  one.  As  a  matter 
of  fact  almost  every  commodity  can  be  and  is,  to  a  greater  or 
less  extent,  produced  by  ourselves.  This  fact  brings  in  a  case 
which  cannot  arise  in  domestic  taxation,  namely,  that  of  an 
untaxed  home  product  competing  with  the  taxed  foreign 
product.  Hence  the  laws  governing  the  case  will  be  more 
complex  than  in  the  case  of  domestic  taxation. 

68.  A  yet  further  difference  in  the  two  cases  arises  from 
the  fact  that  the  British  producer  has  other  nations  to  whom 
he  can  sell,  and  who  perhaps  do  not  levy  the  same  tariff  that 
the  United  States  does.  To  show  how  these  two  differences 
modify  the  result,  let  us  take  the  case  of  writing-paper.  Sup- 
pose that  under  free  trade  a  certain  amount  Q  of  writing-paper 
would  be  annually  imported  from  abroad  and  a  certain  other 
quantity  II  produced  at  home.  Let  a  duty  then  be  levied  upon 
the  foreign  paper.  We  may  suppose  that  the  foreign  manufac- 
turer would  at  first  endeavor  to  throw  the  payment  of  the 
entire  duty  upon  the  American  consumer.  The  latter  would 
then  be  charged  a  higher  price  for  his  paper.  The  result  would 
be  an  attempt  on  his  part  to  economize  in  the  use  of  paper  and 
to  prefer  the  domestic  product.  The  immediate  result  would 
therefore  be  an  increased  demand  upon  the  American  manu- 


III.  68.]          EFFECT  OF  TAXES  ON  PRODUCTION.  295 

facturer  for  paper.  This  would  lead  to  a  rise  in  the  price  of 
the  home  product.  The  effect  of  this  upon  home  production 
would  depend  upon  the  extent  to  which  monopolized  elements 
enter  into  the  manufacture  of  paper,  the  effect  being  determined 
by  the  laws  already  laid  down  in  treating  of  monopolies. 

If  no  monopoly  either  in  skill  or  material  existed,  so  that  large 
numbers  of  men  could  make  paper  as  advantageously  as  the 
most  experienced  makers,  then  this  higher  price  would  stimu- 
late the  manufacture  of  paper.  The  rise  in  the  price  would  be 
cliecked,  and  the  American  consumer,  getting  his  supplies  at 
home,  would  greatly  diminish  his  demand  for  the  foreign  pro- 
duct. 

We  must  now  trace  the  reaction  of  this  diminished  demand 
upon  the  foreign  producer.  If  no  monopolized  elements  enter 
into  the  foreign  product,  then  the  foreign  producer,  making  no 
more  than  the  regular  profit,  could  not  afford  to  lower  his  price 
in  order  to  stimulate  the  declining  demand.  If  he  had  no 
demand  except  what  came  from  America,  those  who  were  least 
able  would  have  to  go  out  of  business,  as  in  the  case  of  home 
taxation.  Just  here,  however,  the  difference  arises.  The  Eng- 
lish manufacturer  has  not  only  America,  but  his  own  country 
and  the  rest  of  the  world,  as  possible  buyers  of  his  product. 
Hence  by  lowering  the  price  in  a  degree  very  slight  compared 
with  the  duty,  he  may  recover  from  other  sources  of  demand 
what  he  has  lost  in  the  American  demand.  He  will  not  there- 
fore be  obliged  to  bear  any  considerable  portion  of  the  tax 
levied  by  America.  This  conclusion  may  be  generalized  as 
follows : 

If  the  greater  part  of  the  supply  of  some  special  commodity 
produced  in  one  country  is  consumed  in  another  country,  then 
a  duty  levied  by  the  consuming  country  may  have  to  he  partly 
borne  by  the  producer.  But  in  the  more  common  case  in  which 
tliere  are  many  home  and  foreign  consumers  of  t/ie  commodity, 
then  either  a  duty  levied  must  be  paid  entirely  by  the  con- 
sumers  of  the  country  which  levies  the  duty,  or  the  importa- 
tion of  the  commodity  must  ceasa. 


296  TUB  LAWS  OF  SUPPLY  AND  DEMAND,        [III.  69. 

60.  The  effect  just  described  upon  the  foreign  producers 
was  deduced  on  the  supposition  of  a  non-monopolized  home 
production.  If,  however,  the  home  production  is  monopolized, 
then  the  increased  home  demand  consequent  upon  the  duty 
will  not  be  entirely  met  by  increased  home  production,  but  by 
increased  home  price.  The  owners  of  the  monopolized  ele- 
ments will  be  able  to  command  a  higher  price  for  their  services. 
The  consumer  will  therefore  have  to  pay  a  higher  price  whether 
he  purchase  the  home  or  foreign  product.  For  a  yet  stronger 
reason  than  before,  the  foreign  producer  will  have  no  motive 
for  materially  diminishing  his  price.  One  result  will  be  a 
diminution  in  the  consumption  of  paper ;  another  will  be  an  in- 
crease in  the  ability  of  the  home  producer  to  command  a  price 
for  his  monopoly. 

We  thus  see  that  an  import  duty  upon  products  into  which 
monopolized  elements  enter  gives  an  immediate  value  to  those 
elements  which  they  would  not  otherwise  have.  Suppose,  for 
example,  that  in  consequence  of  inherent  capacity  and  natural 
aptitude  I  have  acquired  a  peculiar  skill  in  making  a  very  ele- 
gant style  of  paper  at  a  very  small  cost  to  myself.  So  long  as 
I  am  subject  to  the  competition  of  equally  gifted  foreigners  I 
may  be  unable  to  command  more  than  a  moderate  price  for  my 
paper.  If,  however,  I  can  induce  the  government  to  levy  an  im- 
port duty  on  this  particular  kind  of  paper  which  I  alone  in  this 
country  can  make  to  the  best  advantage,  then  I  can  raise  the 
price  either  to  the  highest  limit  which  people  are  willing  to  pay, 
or  to  the  cost  of  production  by  less  favored  persons.  That  is, 
by  the  aid  of  the  tariff  I  shall  be  able  to  command  for  my 
skill  a  higher  price  from  my  fellow-citizens  who  want  the  paper, 
while  my  government  may  not  be  able  to  collect  any  increased 
revenue  from  foreign  importations,  because  the  diminution  of 
imports  may  compensate  for  the  increase  of  duty. 

If,  on  the  other  hand,  there  are  an  unlimited  number  of  my 
countrymen  who  are  as  well  qualified  to  make  this  peculiar 
paper  as  I  am,  then  a  tariff  will  not  benefit  me,  since,  in  any 
case,  I  am  then  subject  to  unlimited  competition. 


III.  70.]  EFFECT  OF  TAXES  ON  INTERNATIONAL  TRADE.  297 

7O.  Effect  of  Import  Duties  on  the  Balance  of  Trade. 
From  the  considerations  in  the  last  chapter  it  follows  that  in- 
ternational trade  is  determined  by  production  and  relative  prices 
in  the  two  countries,  combined  with  cost  of  transportation, 
customs  duties,  and  other  expenses  incident  to  the  exchange. 
The  final  conclusion  to  which  we  are  led  will  be  most  clearly 
seen  by  taking  the  prices  in  some  one  country  as  a  standard  of 
comparison.  Let  us  then  consider  a  unit  of  any  commodity 
produced  in  the  United  States  to  mean  one  dollar's  worth,  as 
determined  by  the  wholesale  price  in  New  York.  Suppose,  to 
fix  the  ideas,  that  in  Liverpool  these  unit  quantities  of  different 
commodities  have  the  values  shown  in  the  following  table. 
The  numbers  in  the  table  are  supposed  to  be  the  quotient  of  the 
price  in  Liverpool  divided  by  the  price  in  New  York. 

Cotton $1.25 

Wheat 1.20 

Leather 1.15 

Petroleum 1.10 

Beef 1.00 

Cloth : 0.95 

Linen 0.90 

Iron 0.85 

Silk 0.80 

Tin 0.80 

Wool 0.75 

Suppose  that  in  this  state  of  things  transportation  cost  noth- 
ing and  trade  were  free.  Then  it  is  evident  that  cotton,  wheat, 
leather,  and  petroleum  would  be  exported  from  New  York  to 
Liverpool,  while  cloth  and  all  the  articles  below  it  on  the  list 
would  be  imported.  If  the  values  of  these  exports  balanced 
that  of  the  imports,  trade  would  continue  on  this  basis,  though 
prices  might  be  brought  more  nearly  to  a  level.  But  suppose 
that  our  exported  articles  exceeded  in  value  those  imported. 
The  result  would  be  an  influx  of  coin  to  pay  for  them,  and  a 
consequent  rise  of  prices  in  this  country.  There  would  then 
be  less  cotton,  less  wheat,  less  leather,  etc.,  in  a  dollar's  worth, 
so  that  the  home  prices  of  these  articles  would  be  brought  more 


TUB  LAWS  OF  SUPPLY  AND  DEMAND.        [III.  70. 

nearly  to  an  equality  with  those  abroad.  The  result  would  be 
a  diminution  in  the  exports  of  those  articles,  and  an  increased 
importation  of  articles  which  it  did  not  before  pay  to  import. 
The  equilibrium  would  be  reached  when  a  sufficient  supply  of 
articles  imported  from  the  bottom  of  the  list  was  taken  to  bal- 
ance those  exported  from  the  top  of  the  list. 

Suppose,  secondly,  that  we  consider  the  cost  of  transportation. 
This  will  depend,  not  upon  the  value  of  the  product,  but  upon 
its  weight  and  bulk.  It  will  prevent  trade  in  those  commodi- 
ties the  prices  of  which  in  the  two  countries  do  not  differ 
by  enough  to  pay  the  cost  of  transportation. 

Let  us  suppose,  next,  that  an  import  duty  of  50  per  cent  ad 
valorem  upon  all  foreign  products  is  levied  by  each  country. 
If  the  above  scale  of  prices  continued  to  hold,  all  trade  would 
be  stopped  by  this  duty. 

Suppose,  however,  that  the  duty  was  levied  only  by  one 
country,  say  America.  If  the  scale  of  prices  were  unchanged, 
there  could  be  no  imports  to  pay  for  the  exports,  because  the 
duty  would  raise  the  price  of  all  foreign  products,  even  that 
of  wool,  above  the  home  price.  Since,  however,  our  cotton, 
wheat,  and  other  commodities  are,  by  hypothesis,  admitted  free 
in  Liverpool,  the  exports  of  those  commodities  would  continue, 
and  would  for  the  time  be  paid  for  in  gold.  The  result  of  this 
influx  of  gold  would  be  a  general  rise  of  prices  in  this  country 
(§  21).  Let  us  now  trace  the  effects  of  this  rise. 

When  it  reached  10  per  cent  the  export  of  petroleum  would 
cease ;  at  15  per  cent,  that  of  leather ;  at  20  per  cent,  that  of 
wheat;  at  25  per  cent,  should  it  reach  that  limit,  that  of  cot- 
ton. For  we  can  export  nothing  unless  the  foreign  exceeds 
the  home  price,  and  each  of  these  percentages  is  the  excess  of 
the  foreign  price  before  the  inflow  of  gold  began. 

To  see  whether  this  prohibitory  limit  would  be  reached,  let 
ns  consider  the  articles  at  the  bottom  of  the  scale.  The  for- 
eign price  of  iron  being  85  cents,  the  duty  of  50  per  cent  would 
raise  its  cost  to  us,  when  imported,  to  $1.27£.  We  should 
therefore  import  none,  even  after  the  rise  in  prices.  The 


III.  71.]  EFFECT  OF  TAXES  ON  INTERNATIONAL  TRADE.  299 

price  of  foreign  silk,  with  duty  added,  would  be  $1.20.  Hence, 
when  the  home  scale  of  prices  rose  to  more  than  20  per  cent, 
we  should  begin  to  import  silk,  tin,  and  wool,  but  should  ex- 
port nothing  but  cotton.  The  reduced  annual  imports  and 
exports  would  then  balance  each  other  at  a  rise  of  between 
20  and  25  per  cent  in  the  scale  of  prices. 

Studying  the  preceding  case,  we  see  that  the  reason  trade 
would  continue  is  that  the  foreign  relative  price  of  the  three 
articles  at  the  bottom  of  the  list  increased  by  50  per  cent,  the 
amount  of  the  duty,  is  still  less  than  the  relative  foreign  price 
of  cotton  at  the  top  of  the  list.  Had  the  duty  been  60  per 
cent,  nothing  but  wool  could  have  been  imported,  and  70  per 
cent  would  have  stopped  all  trade.  Our  conclusions  are : 

I.  The  first  and  immediate  effect  of  a  newly  levied  ad 
valorem  import  duty  is  to  raise  the  scale  of  prices  in  the  coun- 
try which  levies  it. 

II.  The  ultimate  effect,  after  equilibrium  is  reached,  is  to 
stop  all  foreign  trade  except  in  those  commodities  whose  rela- 
tive cost  of  production  in  the  two  countries  differs  by  a  greater 
percentage  than  that  of  the  duty. 

III.  The    import    duly   cannot   permanently  impair   the 
equality  of  values  imported  and  exported,  and  must  there- 
fore diminish  the  one  as  much  as  the  other. 

71.  The  question  may  arise  whether  by  increasing  the  duty 
on  the  articles  at  the  bottom  of  the  list  a  state  of  things  could 
not  be  brought  about  in  which  the  home  supply  would  all  be 
made  in  this  country  and  nothing  would  be  imported.  To  an- 
swer this  question,  let  us  suppose  the  attempt  successful.  We 
should  then  have  a  continual  export  of  wheat,  cotton,  and  other 
commodities  which  would  have  to  be  paid  for.  If  the  duties  are 
so  high  that  the  exports  are  not  paid  for  in  goods,  they  would 
have  to  be  paid  for  in  money.  Thus  would  arise  a  continual  in- 
crease in  the  volume  of  the  currency,  accompanied  by  an  increase 
in  the  price.  This  increase  could  never  stop  until  the  influx  of 
gold  was  stopped  by  our  exports  being  paid  for  in  goods. 


; {,  H  )  TUB  LA  WS  OF  SUPPL  T  AND  DEMAND. 

It  must  bo  remembered  that  this  increase  of  price  would  not 
be  confined  to  imported  articles,  but  would  affect  the  wheat  and 
cotton  exported.  When  the  price  of  these  articles  became  as 
high  as  they  were  abroad,  then  their  export  would  necessarily 
cease,  and  thus  we  should  have  an  end  of  all  trade.  "We  there- 
fore reach  the  conclusion, 

By  no  device  of  levying  duties  can  we  permanently  prevent 
the  import*  and  exports  from  balancing  each  other. 

EXERCI3ES. 

1.  If  a  personal  tax  should  be  levied  on  all  persons  having  red  hair,  could 
those  persons  charge  a  higher  price  for  their  services  in  consequence  ? 
What  would  be  the  effect  of  such  a  tax  ? 

2.  In  a  community  where  grocers  have  to  purchase  a  license  to  carry  on 
Iheir  business,  can  they  charge  a  higher  price  for  their  goods  in  consequence  ? 
In  what  manner  is  the  equilibrium  restored  if  disturbed  by  such  a  tax  ? 

If  a  tax  is  levied  upon  an  income  derived  from  patents,  can  the  person 
taxed  collect  it  from  others  by  charging  a  higher  pries  ? 

3.  Show  the  error  of  the  following  reasoning:  The  monopolist  is  the  very 
person  who  can  best  afford  to  be  taxed.    For,  since  he  has  a  monopoly, 
he  can  charge  what  price  he  pleases  for  his  monopolized  products,  and  can 
therefore  collect  the  entire  tax  from  his  customers  by  raising  the  price  of 
those  products.    (Cf.  §  C5.) 

4.  Show  more  explicitly  than  is  done  in  §  54  that  there  can  be  no  trade 
between  two  countries,  how  great  soever  the  difference  of  their  general  pro- 
ducing capacities,  if  the  relative  producing  capacities  are  the  same  for  all 
commodities.    Put  the  hypothesis  in  this  shape:  Of  the  various  necessaries 
of  life- 
Country  A  produces  the  quantities  M,  N,  P,  Q,  etc.,  per  man. 
Country  B  produces  the  quantities  i  M,  i  N,  i  P,  |  Q.  etc.,  per  man. 

5.  Apply  the  proposition  that  a  tax  on  production  has  the  same  effect 
as  an  increase  of  the  cost  of  production  to  the  case  of  international  trade. 
Is  there  any  difference  between  the  economic  effects  of  an  import  duty 
and  an  increase  in  the  cost  of  ocean  transportation  arising  from  an  increase 
in  the  price  of  coal  ? 

6.  What  would  be  the  economic  effect  of  a  tax  of  ten  per  cent  of  the 
gate-money  at  all  horse-races  ? 

*  7.  If  so  heavy  a  tax  should  be  levied  on  the  home  manufacture  of 

*  The  student  will  be  better  able  to  grapple  with  the  questions  marked 
by  an  asterisk  after  he  has  been  through  the  next  book,  and  he  should  then 
return  to  them. 


EXERCISES.  301 

paper  as  to  eutirely  stop  its  production,  \vlrile  the  foreign  article  was 
admitted  free,  would  there  arise  any  increased  demand  for  other  home 
products  to  compensate  for  the  loss  of  the  paper? 

8.  Show  under  what  conditions  the  following  may  be  true:  "We  may 
often,  by  trading  with  foreigners,  obtain  their  commodities  at  a  smaller 
expense  of  labor  and  capital  than  they  cost  to  the  foreigners  themselves." 
If  you  have  any  difficulty,  consider  how  much  of  the  labor  of  a  hod-carrier 
an  eminent  lawyer  can  command  by  an  hour's  work. 

9.  If  the  farmers  of  the  United  Slates  could  raise  cotton  in  unlimited 
quantities  at  a  cost  of  two  cents  a  pound,  what  effect  would  this  have 
upon  the  industry  and  foreign  exchanges  of  the  country?    What  would  be 
the  benefit  to  the  world  at  large? 

*10.  If  English  operatives  should  lose  their  skill,  and  their  capitalists 
cease  to  manufacture,  in.  what  way  would  our  interests  be  affected? 

11.  Are  there  any  American  manufactures  whose  production   requires 
monopolized  elements,  and  which  under  the  influence  of  an  import  duty 
will  be  sold  abroad  cheaper  thau  at  home?    Show  under  what  conditions 
such  a  result  is  possible.     Take  as  an  extreme  example  the  following  case: 
A  farmer  discovers  a  mine  of  copper  on  his  farm  from  which  he  can 
obtain  the  metal  in  unlimited  quantities  at  one  third  the  current  cost. 
Our  import  duty  is  45  per  cent  ad  valorem.     How  are  the  most  advan- 
tageous selling  prices  for  the  farmer  at  home  and  abroad  respectively 
determined? 

12.  Should  it  be  regarded  as  a  sign  of  want  of  skill,  or  as  a  sign  of 
prosperity,  that  the  imports  of  a  country  are  very  large  in  proportion 
to  its  population? 

*13.  Within  two  or  three  years  of  the  close  of  the  Franco-German  War 
the  French  paid  an  indemnity  of  5,000,000,000  francs  to  the  Germans, 
having  raised  the  money  by  loans  Is  it  to  be  supposed  that  there  was 
any  actual  transport  of  this  amount  of  coin  from  France  to  Germany? 
Whether  there  was  or  not,  explain  what  the  economic  result  of  the  pay 
ment  finally  was. 

*14.  If  five  thousand  Americans  go  to  Europe  for  the  summer  and  spend 
abroad,  on  an  average,  $1000  each,  what  is  the  ultimate  effect  of  this  ex- 
penditure? 

15.  If  our  government  could  adopt  such  a  policy  that  we  could  export  aa 
small  or  as  great  a  value  as  we  pleased  in  payment  for  a  given  volume  of 
imports,  ought  it  to  make  the  exports  large  or  small  in  amount? 


303  TUB  LAWS  OF  SUPPLY  AND  DEMAND.        [III.  72. 


CHAPTER  XII. 

THE   CAUSES   WHICH    DETERMINE   THE   RATE   OF   INTEREST. 

72.  THE  question  of  usury  has  been  one  of  the  stumbling- 
blocks  of  mankind  in  all  ages.  Except  in  the  most  intelligent 
society,  and  in  recent  times,  the  taker  of  "  usury "  has  been 
generally  looked  upon  as  one  who  unjustly  made  a  profit  with- 
out rendering  any  service  in  return.  The  view  of  the  natural 
man  may  be  illustrated  as  follows :  I  loan  a  man  $1000.  Dur- 
ing the  year  it  remains  in  his  hands  I,  the  owner  of  the  money, 
have  nothing  to  do  with  it  and  have  no  agency  in  its  operations, 
yet  at  the  end  of  the  year  I  demand  and  receive  back  from  him 
not  only  the  $1000,  but  $50  or  perhaps  $100  or  more  in  the 
way  of  compensation.  Compensation  for  what  ?  Apparently 
not  for  anything  I  have  done  or  been  doing.  Not  for  my  labor 
in  gaining  the  $1000,  because  I  was  compensated  for  that  when 
I  got  the  money;  not  for  anything  I  did  afterwards,  because  I 
did  nothing  afterwards.  Thus  it  looks  as  if  I  got  my  interest 
without  rendering  any  service  whatever.  The  case  seems 
strengthened  when  traced  to  its  every-day  consequences.  If, 
by  iny  own  earnings  or  by  inheritance,  I  am  fortunate  enough 
to  be  the  owner  of  $100,000  or  more,  I  can  spend  my  life 
without  performing  any  labor  whatever,  and  live  in  comfort, 
and  perhaps  in  affluence,  on  what  society  pays  me  as  interest 
without  expending  any  of  my  original  fortune. 

Yet  if  we  look  at  concrete  cases  we  shall  see  that  this 
difficulty  must  be  surmountable.  If  the  usurer  were  a  person 
who  forcibly  compelled  people  to  take  his  money  and  pay  him 
interest  for  it,  then  the  preceding  general  conclusion  would  be 
evidently  correct.  But,  as  a  matter  of  fact,  he  never  loans 
money  unless  some  one  conies  to  him  for  it,  and  is  willing  to 
pay  the  interest  demanded.  Now,  evidently  no  one  will  do  this 


III.  72.]  CAUSES  AFFECTING   THE  RATE  OF  INTEREST.    303 

unless  he  expects,  by  means  of  the  money,  to  receive  not  only 
the  benefit  of  the  money  itself,  but  of  the  interest  which  he  ex- 
pects to  pay.  Of  course  it  is  here  presumed  that  the  borrower 
knows  what  he  wants  and  what  he  is  likely  to  do,  and  that  he 
is  not  systematically  the  victim  of  a  delusion  which  prompts 
him  to  seek  that  which  is  going  to  do  him  an  injury.  As  a 
matter  of  fact,  if  we  look  into  the  case,  we  shall  find  that  as  a 
rule  the  borrower  of  money  does  gain  by  the  bargain.  Take 
for  example  the  owner  of  a  fertile  pasture-field  in  California. 
The  field  is  of  no  use  to  him  unless  he  can  stock  it  with  sheep. 
Unless  he  can  find  somebody  to  supply  him  with  sheep,  he 
may  have  to  sell  half  his  field  in  order  to  get  sheep  for 
the  other  half.  Instead  of  doing  this  he  goes  to  a  capitalist, 
borrows  money,  perhaps  at  twelve  per  cent  interest,  and  buys 
the  necessary  sheep.  At  the  end  of  the  year  he  sells  his  wool 
and  receives  for  it  more  than  he  has  expended  for  pasturage 
and  services,  and  still  has  his  sheep.  He  pays  the  capitalist  his 
interest,  and  is  still  richer  than  he  was  when  he  started.  He 
could  sell  the  sheep,  and  with  the  proceeds  pay  off  the  principal 
and  have  a  profit  left. 

What  has  gained  this  profit?  Only  his  own  labor  and  ex- 
ertions, says  the  objector.  But  this  is  clearly  an  error,  for  it  is 
certain  that  if  nothing  but  his  own  labor  and  exertions  were 
necessary  he  would  not  have  gone  to  the  capitalist  at  all.  His 
labor  would  have  been  worthless  without  the  sheep,  and  he  could 
not  get  the  sheep  without  money.  But  granting  this,  the  ob- 
jector asks,  "What  right  had  the  capitalist  to  charge  him  interest  \ 
The  answer  is  that  in  the  course  of  the  year  the  man  has  been 
enabled  to  make  twice  as  much  profit  with  the  capitalist's 
money  that  he  could  have  made  without.  Nothing,  therefore, 
can  be  more  equitable  and  just  than  that  the  capitalist  should 
have  his  share  of  what  his  money  helped  to  produce.  Between 
rational  people  there  can  be  no  lending  and  borrowing  unless 
it  is  expected  that  the  money  is  going  to  enable  the  borrower 
to  gain  more  than  its  interest,  through  the  advantage  it  gives 
him.  Without  this  it  would  be  unwise  for  him  to  borrow. 


304  T11E  LAWS  OF  SUPPLY  AND  DEMAND.        [III.  73. 

Indeed  without  this  it  will  be  unwise  for  the  capitalist  to 
lend,  because  he  may  not  get  his  money  back  again  unless 
the  borrower  has  been  so  successful  in  the  use  of  it  as  to  be 
able  to  repay  it  with  interest.  Thus  the  difficulty  which  we 
have  cited  is  simply  a  wrong  way  of  looking  at  things,  and 
arises  from  neglecting  or  overlooking  the  principle  that  every 
agency  necessary  to  production  is  to  be  counted  as  a  factor  in 
production.  The  mistake  is  of  the  same  nature  as  when  we 
look  upon  a  brick  house  as  simply  a  product  of  the  labor  of 
brickmakers,  bricklayers,  and  carpenters,  and  leave  out  of  ac- 
count the  knowledge  and  skill  which  were  necessary  to  organize 
and  direct  their  work. 

73.  Since  there  are  people  always  ready  to  borrow  money 
and  others  ready  to  supply  it,  it  follows  that  we  may  speak  of 
supply  and  demand  in  borrowing  and  lending  money  as  we  do 
in  exchange.  Moreover,  we  can  easily  see  that  the  rate  of  in- 
terest is  determined,  at  least  for  the  time  being,  by  the  relation 
between  demand  and  supply,  just  as  the  price  of  goods  is  so  de- 
termined. Every  increase  in  the  rate  of  interest  tends  to  dis- 
courage borrowers  and  thus  to  diminish  demand,  for  the  same 
reason  that  a  rise  in  prices  diminishes  the  demand  for  goods. 
It  also  increases  the  supply  by  offering  stronger  inducements  to 
owners  of  money  to  save  and  lend  it  instead  of  spending  it 
themselves.  Thus  in  each  state  of  the  market  there  will  be  a 
certain  rate  of  interest  at  which  the  supply  and  demand  for 
money  to  lend  and  borrow  will  be  equal.  When  the  demand 
exceeds  the  supply  the  rate  of  interest  will  rise,  thus  checking 
the  demand  and  stimulating  the  supply.  When  demand  falls 
off,  the  rate  of  interest  falls  also,  thus  discouraging  the  supply 
and  encouraging  the  demand. 

Fluctuations  of  this  sort  are  seen  from  week  to  week  and 
month  to  month  in  the  great  money-centres  of  the  world.  The 
Bank  of  England  fixes  its  rate  of  discount  from  time  to  time 
according  to  the  state  of  the  market,  to  which  it  therefore 
serves  as  an  index.  Ordinarily  the  rate  is  three  or  four  per 


III.  74.1  CAUSES  AFFECTING  TEE  RATE  OF  INTEREST.    305 

cent  per  annum.  But  occasionally  satisfactory  borrowers  can- 
not be  found  without  going  even  below  three  per  cent.  Occa- 
sionally the  rate  rises  to  six,  eight,  or  ten  per  cent.  In  America 
the  prevalence  of  usury  laws  nominally  prevents  these  fluctua- 
tions; but  the  result  of  this  is  that  when  the  demand  for 
money  is  so  great  that  the  rate  of  interest  necessary  to  equalize 
demand  and  supply  is  above  the  legal  rate,  the  banks  select 
the  customers  to  whom  they  will  lend.  The  principles  upon 
which  this  is  done  will  be  discussed  later ;  all  we  have  at  pres- 
ent to  understand  is  that  in  each  state  of  the  market  there  is  a 
certain  definite  rate  of  interest  which  will  equalize  demand  and 
supply. 

74.  All  this  does  not,  however,  tell  us  why  in  the  long-run 
money  should  have  a  definite  rate  of  interest.  Why  is  it,  for 
example,  that  in  a  certain  state  of  the  market  the  borrowers 
and  lenders  should  be  in  such  proportion  that  four  per  cent 
per  annum  would  equalize  the  two  rather  than  one  per  cent  or 
fifty  per  cent  ? 

To  answer  this  question  we  have  to  examine  the  causes  upon 
which  the  demand  and  the  supply  respectively  depend,  and  see 
by  what  conditions  they  are  equalized.  In  order  that  any  person 
may  be  willing  to  borrow  money  at  a  definite  rate  of  interest, 
he  must  consider  that  he  has  at  least  an  average  chance  of  gain- 
ing more  than  that  rate  by  means  of  the  money.  At  this  point 
a  source  of  confusion  is  to  be  noted  and  avoided.  What  the 
borrower  really  pays  interest  for  is  capital,  not  money.  The 
borrower  can  gain  nothing  by  keeping  the  money ;  all  he  bor- 
rows it  for  is  to  purchase  some  kind  of  capital.  True,  it  is 
morally  and  physically  possible  that  he  might  expend  the  money 
in  his  own  support.  But  a  man  who  would  do  this  would 
never  be  able  to  borrow  at  all.  As  a  matter  of  fact,  it  is  always 
necessary  that  the  lender  should  have  full  assurance  that  the 
borrower  will  be  able  to  pay,  and  he  therefore  requires  that  the 
borrower  shall  place  a  full  equivalent  of  capital,  with  a  margin 
to  guard  against  loss,  in  possession  of  the  lender  or  of  some 
20 


306  THE  LAWS  OF  SUPPLY  AND  DEMAND.        [III.  74. 

trustee.  Such  a  legal  conveyance  of  the  ownership  of  capital  to 
guard  a  lender  against  loss  is  a  mortgage. 

We  see  then  that  what  is  called  the  rate  of  interest  on  money 
is  not  a  property  of  the  money  itself,  but  depends  upon  the  ad- 
vantage which  capital  gives  its  owner  in  production.  "VVe  have 
then  to  see  in  what  this  advantage  consists.  In  the  first  place,  it 
has  been  pointed  out  that  capital  is  a  labor-saving  agent  (II.  29). 
Its  fundamental  property  is  that,  with  the  aid  of  labor,  it  returns 
its  user  at  some  future  time  a  value  greater  than  that  of  the  capi- 
tal and  labor  combined.  For  example,  if  by  expending  $100  in 
any  kind  of  capital  to-day,  the  manufacturer  finds  that  he  can 
add  810  per  year  to  the  net  value  of  his  product,  after  paying 
for  the  additional  labor,  and  deducting  all  the  cost  of  keeping  up 
his  capital  to  its  original  value  of  $100,  then  that  capital  yields 
him  a  profit  of  ten  percent  per  annum.  If  the  increase  of  pro- 
duction does  not  exceed  the  cost  of  keeping  up  the  capital,  then 
he  would  make  no  greater  profit  with  the  capital  than  without 
it,  and  so  there  would  be  no  use  in  his  acquiring  capital  at  all. 

It  has  already  been  shown  that  nature  may  be  said  to  keep  a 
number  of  standing  offers  of  interest  upon  capital  open  to  the 
world  (II.  29).  These  offers  take  the  form  of  opportunities  for 
digging  canals,  building  railways  and  tunnelling  mountains,  and, 
in  general,  of  developing  the  resources  of  the  country.  The 
rate  of  profit  offered  depends  upon  how  far  the  country 
is  already  developed.  In  an  absolutely  new  country,  such  as 
America  was  three  centuries  ago,  we  can  hardly  set  any  limit 
to  the  rate  of  interest  offered  by  nature.  This  is  the  same 
thing  as  saying  that  capital  was  very  much  needed,  or  that 
there  was  great  room  for  improvement  in  the  facilities  for  pro- 
duction. At  the  present  time  it  is  not  always  possible  to  know 
with  certainty  in  advance  what  rate  of  interest  nature  does 
offer  for  building  a  particular  railway  or  factory.  But  men 
engaged  in  the  management  of  capital  make  the  best  estimate 
they  can  of  the  profit  to  be  gained  in  each  case,  and  select  their 
field  of  investment  accordingly. 

Next  consider  the  case  of  circulating  capital.   A  manufacturer 


III.  75.]  CAUSES  AFFECTING  THE  BATE  OF  INTEREST.    307 

finds  that  -with  the  machinery  lie  already  possesses  and  the  la- 
borers he  already  employs  he  can  make  more  goods  than  he  does. 
But  to  do  this  he  must  increase  his  stock  of  raw  materials.  If 
he  has  not  the  means  of  doing  this,  he  must  borrow  money 
in  order  to  purchase  the  necessary  materials.  In  order  that  he 
may  gain  a  profit  exceeding  the  interest  which  he  pays,  he 
must  be  able  to  sell  his  increased  product  at  an  advance  over 
the  increased  cost  of  material  and  labor.  Were  the  state  of 
things  such  that  neither  he  nor  any  other  manufacturer  could 
do  this,  there  would  be  no  profit  in  increasing  the  quantity  of 
goods  manufactured,  and  the  work  would  remain  stationary. 
Hence,  although  circulating  capital  is  not  a  labor-saving  agent, 
it  is  yet  a  requisite  of  production  whose  accumulation  requires 
abstinence  from  its  immediate  enjoyment  on  the  part  of  the 
owner. 

75.  Next  let  us  see  in  what  way  this  demand  acts  upon 
the  supply.  The  first  question  is,  Why  is  the  supply  of  money 
to  lend  limited  at  all  ?  The  reason  is  that  the  amount  of  every 
man's  income  which  he  is  able  and  willing  to  save  from  current 
expenditures  is  limited,  and  this  is  all. he  can  have  to  lend.  A 
large  fraction,  probably  a  large  majority,  of  the  population  do 
not  expect  permanently  to  save  anything  for  use  as  capital.  It 
is  to  the  few  whose  incomes  are  so  large  or  whose  personal 
wants  are  so  few  that  they  are  willing  to  save  that  borrowers 
must  look  for  capital.  Now,  unless  some  interest  is  to  be 
gained  as  the  result  of  saving,  there  is  no  strong  motive  for  any- 
body to  save  more  than  is  necessary  for  the  support  of  himself 
and  his  family,  and  for  insurance  against  want  in  his  old  age. 

To  see  this  by  an  example,  suppose  that  you  have  gained  one 
hundred  dollars.  You  have  your  choice  to  expend  it  in  some- 
thing for  present  enjoyment,  or  to  postpone  the  expenditure  to 
some  future  time,  say  the  end  of  the  year.  Perhaps  you  intend 
to  buy  a  cyclopaedia,  and  the  question  is  whether  you  shall  buy 
it  now  or  at  the  end  of  the  year.  Other  conditions  being  equal, 
the  advantage  is  in  favor  of  buying  it  now,  because  then  you 


308  TUB  LAWS  OF  SUPPLY  AND  DEMAND.         [III.  76. 

will  have  the  enjoyment  of  it  during  the  year,  while  if  you 
postpone  the  purchase,  you  not  only  lose  this  enjoyment,  but 
you  may  die  in  the  mean  time  and  thus  lose  all  opportunity  of 
any  enjoyment  of  your  money.  If  then  a  manufacturer  comes 
to  you  and  wants  to  borrow  the  money,  it  is  evident  that  you 
and  he  cannot  both  have  the  benefit  of  what  the  money  may 
purchase  during  the  year  coming.  You  will  therefore  refuse 
him  unless  he  pays  you  what  you  consider  a  sufficient  compen- 
sation for  going  one  year  without  the  use  of  the  cyclopaedia. 

Viewing  the  same  case  from  a  different  standpoint,  let 
us  suppose  that  you  do  not  under  any  circumstances  want  the 
cyclopaedia  until  the  end  of  the  year, — perhaps  indeed  it  is  not 
to  be  published  until  after  that  interval, — and  that  you  have  not 
yet  earned  the  money  to  buy  it.  The  question  then  takes  the 
form,  Shall  you  earn  the  money  necessary  to  purchase  it  now,  or 
shall  you  wait  until  you  want  it?  Unless  you  are  so  fortunate 
that  you  can  earn  a  hundred  dollars  without  any  disagreeable 
labor,  your  wisest  course  is  to  wait.  It  will  at  worst  cost  you 
no  more  to  earn  the  money  a  year  hence  than  it  will  now,  and, 
since  the  future  is  always  uncertain,  it  is  best  not  to  expend 
labor  for  what  after  all  may  fail  to  yield  fruition.  And  so  for 
this  reason  also  yon  have  no  sound  motive  for  earning  the 
money  in  advance,  unless  you  are  to  make  a  future  profit  by 
doing  so.  Thus,  as  a  general  rule,  there  will  be  no  money  to 
loan  unless  interest  is  to  be  gained. 

76.  The  minimum  below  which  the  rate  of  interest  can 
never  fall  is  that  which  just  suffices  to  induce  the  sovers  of 
income  to  earn  an  income  in  advance  of  their  enjoyment  of 
it.  What  rate  this  is  is  a  fact  of  human  nature  which  can  be 
learned,  not  by  reasoning,  but  only  by  observation.  Human 
nature  differs  so  widely  with  different  men  that  not  even  the 
law  of  averages  can  be  satisfactorily  applied,  except  in  a  single 
place  and  at  a  given  time.  Some  men  are  in  receipt  of  great 
incomes  without  any  more  exertion  than  is  really  necessary  to 
their  enjoyment  of  life.  To  such  men  it  is  all  the  same  whether 


III.  76.]  CAUSES  AFFECTING  THE  RATE  OF  INTEREST.    309 

they  earn  money  now  or  next  year,  and  they  might  be  willing 
to  part  with  it  without  receiving  any  interest  at  all.  In  the 
case  of  other  men  a  certain  instinct  of  what  is  right  leads  them 
to  live  frugally  and  thus  to  expend  less  than  their  income. 
Such  men  will  be  willing  to  loan  at  a  very  low  rate  of  inter- 
est. These  cases  are,  however,  exceptional,  and  the  rule  is  that 
men  save  only  in  consequence  of  the  interest  they  are  to  gain. 
The  numerical  value  of  the  minimum  rate  of  interest  is  a 
result  of  certain  qualities  of  human  nature  which  we  cannot 
measure  with  certainty.  It  is,  however,  a  curious  fact  that  up 
to  the  present  stage  of  human  history  the  rate  of  interest  has 
rarely  fallen  below  that  which  would  yield  a  young  man,  in 
the  course  of  his  average  life,  a  profit  equal  to  the  principal  in- 
vested. The  expectation  of  life  for  a  man  at  twenty  may  be 
put  at  forty  years.  If  he  has  gained  a  certain  capital  it  will, 
without  any  investment,  last  him  his  average  life,  if  he  con- 
sumes two  and  a  half  per  cent  of  it  per  annum.  Hence,  so  far 
as  he  is  individually  concerned,  he  has  no  motive  for  saving 
unless  he  can  gain  this  rate  of  interest.  Now  this  is  about 
the  minimum  rate  yet  known.  Of  course  no  perfectly  exact 
numerical  statement  can  be  made  in  such  a  case,  because  the  rate 
is  always  fluctuating ;  but  this  is  a  sufficient  approximation  for 
our  purpose.  Since,  then,  as  human  nature  is  constituted,  the 
supply  of  capital  tends  to  diminish  as  the  rate  of  interest  falls,  it 
follows  that  all  persons  who  want  capital  must  pay  interest. 
Nature  is  competing  with  them,  and  they  must  at  least  pay  her 
price.  But  the  rate  they  have  to  pay  may  be  very  small.  As 
a  country  increases  in  wealth,  the  rate  of  interest  tends  to  fall, 
both  from  diminished  demand  and  increased  supply.  Nature 
continually  offers  less  and  less,  as  the  resources  of  a  country  are 
developed,  and  the  accumulation  of  raw  material  and  the  de- 
velopment of  factories  constantly  approach  the  limit  at  which 
no  further  profit  can  be  made  by  the  further  increase  of  capi- 
tal. Again,  as  wealth  increases  men  are  more  and  more  able 
to  save,  and  thus  the  supply  increases. 


310  THE  LAWS  OF  SUPPLY  AND  DEMAND.        [III.  77. 

77.  Risk  as  affecting  the  Rate  of  Interest.  In  the  pre- 
ceding discussion  we  have  taken  no  account  of  the  risk  which 

O 

a  lender  incurs  of  wholly  or  partially  losing  the  money  he  has 
loaned,  in  consequence  of  inability  on  the  part  of  the  borrower 
to  repay  him.  For  this  risk  he  must  be  compensated  ;  and  of 
course  the  amount  of  the  compensation  will  be  greater  the 
greater  the  risk.  Since  he  is  himself  the  sole  judge  of  the 
risk  and  the  compensation,  no  sure  mathematical  law  can  be 
laid  down  to  govern  the  case.  The  mathematical  theory  of 
probabilities,  however,  embodies  a  principle  which  is  applicable 
to  a  certain  class  of  cases,  if  the  lender  reaches  his  conclusions 
in  the  most  reasonable  manner.  This  principle  is  that  the  com- 
pensation for  a  risk  is  equal  to  the  amount  in  jeopardy  mul- 
tiplied by  the  probability  of  loss.  Suppose,  for  example,  that 
from  the  best  judgment  which  a  lender  can  form  there  is  one 
chance  out  of  twenty  that  the  borrower  with  whom  he  is  deal- 
ing will  fail  within  a  year.  We  then  say  that  the  probability 
of  failure  within  the  year  is  one  twentieth,  and  the  proper  com- 
pensation for  the  risk  would  be  five  per  cent  per  annum.  If 
the  minimum  rate  of  interest  were  also  five  per  cent,  then  the 
lender  should  receive  ten  per  cent  per  annum  for  his  money. 

We  ought  perhaps  to  say  that  this  is  the  minimum  which  he 
as  a  prudent  man  ought  to  accept.  If  his  situation  is  such 
that  the  loss  of  the  money  would  reduce  him  to  distress,  he 
ought  to  demand  a  higher  compensation  on  account  of  the  risk. 
The  wealthier  he  is  the  nearer  this  reasonable  compensation 
will  approach  the  mathematical  limit.  It  can  never  fall  below 
that  limit. 

78.  The  Nature  of  Capital  and  Cause  of  Interest.  The 
reader  who  has  carefully  mastered  the  subject  of  capital  and 
interest  will  see  that  they  depend  fundamentally  upon  the  fact 
that  time,  and  perhaps  a  long  time,  must  elapse  between  the 
performance  of  labor  and  the  enjoyment  of  its  products  if 
we  would  get  the  maximum  of  ultimate  enjoyment  from  our 
labor.  For  example : 

If  I  sow  a  crop,  I  must  wait  a  year  for  its  final  enjoyment. 


III.  78.]  CAUSES  AFFECTING   THE  HATE  OF  INTEREST.    3H 

If  I  raise  a  liorse,  lie  will  not  be  of  any  use  for  three  or 
four  years,  and  I  may  not  get  all  the  use  of  him  for  ten  or 
fifteen  years. 

If  I  build  a  railway,  I  may  not  be  fully  compensated  for 
my  labor  until  after  the  lapse  of  twenty  or  thirty  years. 

Now,  as  I  am  situated  in  civilized  society,  I  have  my  choice 
either  to  enjoy  all  my  labor  shortly  after  the  time  of  perform- 
ing it,  or  to  postpone  my  enjoyment  for  one  or  many  years. 

The  longer  I  am  willing  to  postpone  my  enjoyment  the  more 
thorough  and  effective  I  can  make  the  agencies  by  which  my 
future  wealth  is  to  be  produced,  and  hence  the  greater  the 
amount  of  ultimate  enjoyment  which  I  or  my  posterity  can 
command  from  my  labor. 

But  my  wants  are  immediate.  I  cannot  live  now  on  next 
year's  crop,  nor  haul  my  crop  to  market  with  a  new-born  colt. 
I  must  be  fed,  clad,  and  housed  while  working  for  my  future 
self. 

He  who  loans  me  money  is  one  who  enables  me  to  devote 
my  labor  to  my  future  good  by  feeding,  clothing,  and  housing 
me  now,  and  hence  enables  me  to  produce  more  wealth  in  the 
long-run.  If  he  does  not  require  repayment  of  the  money 
until  I  have  begun  to  gain  the  increased  means  of  enjoyment, 
it  is  just  that  I  share  the  increase  with  him  when  I  do  pay  it. 
Interest  is  the  excess  which  I  pay  him  on  account  of  his  per- 
mitting me  to  anticipate  the  future  results  of  my  labor  by  en- 
joying now  what  otherwise  I  would  only  have  enjoyed  in  the 
future,  or  perhaps  would  never  have  enjoyed. 

"When  I  devote  myself  to  labor  intended  to  yield  sustenance 
only  in  the  distant  future,  Tdo  not  engage  in  the  direct  pro- 
duct of  the  sustenance,  but  in  the  production  of  some  inter- 
mediate form  of  wealth  intended  to  increase  the  productiveness 
of  my  future  labor.  This  intermediate  form  of  wealth  we  call 
capital. 


312  TUB  LAWS  OF  SUPPLY  AND  DEMAND.  [III.  78. 

EXERCISES. 

1.  Bastiat  illustrates  interest  by   supposing  one  carpenter,  James,  with 
ten  days'  labor,  to  make  a  plane  which  he  loans  to  William.     The  latter 
uses  it  for  290  of  the  800  working  days  of  the   year,  when  it  is  worn 
out     He  spends  the  remaining  10  days  of  the  year  in  making  a  new  plane 
to  return  to  James,  but,  in  addition,  he  gives  him  a  plank  as  interest. 
Mr.  Henry  George  says  William  lost  the  value  of  this  plank  by  his  bargain, 
because  he  could  have  spent  the  first  10  days  of  the  year  in  making  him- 
self a  plane,  instead  of  the  last  10  days,  and  would  then  have  saved  his 
plank.     Show  the  fallacy. 

2.  Explain  why  the  rate  of  interest  is  highest  in  newly-settled  countries. 
Especially  what  causes  affected  the  rate  of  interest  in  California  immediately 
after  the  gold  discoveries  ? 

3.  Show  the   effects  of  discovering  improved  methods  of  production 
upon  the  rate  of  interest,  and  explain  how  the  effect  depends  upon  the  cost 
liness  of  the  machinery  needed  to  put  the  improvements  into  operation. 

4.  What  effect  has  a  low  current  rate  of  interest  upon  the  price  of  gov- 
ernment bonds  bearing  interest  at  a  fixed  rate  ? 

5.  Explain  how  it  is  that  usury  laws  do  not  generally  make  the  rate  of 
interest  lower,  but  rather  tend  to  prevent  men  from  lending  their  money. 
Take  the  following  example  of  their  spirit:  A  man  in  pecuniary  difficulties 
goes  to  a  capitalist  saying,  "Could  I  only  borrow  a  thousand  dollars  for  a 
year,  I  could  come  out  with  a  handsome  profit.    But  if  I  cannot  get  this 
loan,  I  shall  be  ruined  and  my  family  will  be  destitute.     If  the  capitalist 
saves  the  man  by  loaning  him  the  money  at  12  per  cent  interest  and  com- 
pensation for  risk,  the  usury  laws  punish  him  by  perhaps  forfeiting  the 
entire  sum  loaned.    If  he  replies  to  the  man,  "No,  I  will  not  help  you  on 
any  terms  whatever,  and  if  your  family  starves  it  is  none  of  my  concern," 
the  law  does  not  censure  him. 

6.  Explain  the  relation  of  interest  to  the  increased  productivity  of  labor 
due  to  the  use  of  capital. 

7.  How  does  carelessnsas  on  the  part  of  a  community  respecting  its  future 
needs  affect  the  rate  of  interest? 


BOOK  IV. 

THE 
SOCIETAJRY     CIRCULATION. 


IV.  1.]  THE  MONETARY  FLOW.  315 


BOOK  IV.— THE  SOCIETART  CIRCULATION. 


CHAPTER  I. 

THE  MONETARY   FLOW. 

1.  WE  have  now  to  present  the  reader  with  a  method  of 
representing  the  exchanges  within  a  social  organism  considered 
in  their  totality.  The  object  of  the  method  is  to  facilitate  the 
study  of  the  action  of  economic  causes  upon  production  and 
exchange. 

There  is  no  act  of  exchange  the  effects  of  which  terminate 
with  the  act  itself.  When  the  ownership  of  any  commodity 
passes  from  A  to  B,  that  passage  may  only  pave  the  way  for 
another  transfer  from  B  to  C,  and  so  on  until  the  commodity 
reaches  the  person  who  is  finally  to  consume  it.  A  piece  of 
money  changes  hands  without  end,  since  every  person  who 
receives  it  expects,  unless  in  exceptional  cases,  to  pay  it  out 
again  to  some  one  else. 

We  call  to  mind  that  under  our  present  system  every  ex- 
change is  a  double  transfer  of  ownership — money  passing  in 
one  direction,  and  the  ownership  or  enjoyment  of  wealth  in 
the  other  direction.  We  thus  have  two  separate  processes  of 
transfer,  one  of  money  and  the  other  of  wealth  or  its  enjoy- 
ment. We  shall  consider  these  two  systems  separately,  and 
afterwards  show  the  relation  between  them.  The  transfer  of 
money  is  the  most  simple  in  its  conception,  and  we  shall  there- 
fore begin  with  it. 


316  THE  SOCIETART  CIRCULATION.  [IV.  3. 

2.  The  Dual  Conception  of  Economic  Quantities.    We 
now  have  to  draw  a  distinction  between  two   measures  or 
conceptions  of  economic  quantities  the  neglect  of  which  has 
been  a  potent  cause  of  dispute  between  schools,  and  inexact- 
ness of  thought.     This  distinction  is  that  between  a  fund, 
or  accumulated  quantity,  and  a  flow.     Applied  to  a  material 
substance  like  water,  this  would  be  expressed  as  the  distinc- 
tion between  a  reservoir  of  water  and  &flow  of  water.    We 
have  a  conception  of  a  certain  number  of  gallons  of  water 
stored  up  in  a  mill-pond.     We  also  have  a  conception  of  a 
rate  of  flow  into  the  pond,  or  out  of  it,  of  so  many  gallons  per 
hour.     Now,  there  is  no  fixed  relation  between  these  two  con- 
ceptions.    A  very  large  mill-pond  may  have  a  very  small  flow 
of  water  from  it,  and  a  small  pond  may  have  a  much  larger 
flow.     If  we  were  told  that  one  pond  had  a  much  larger  sup- 
ply of  water  than  another,  this  statement  would  be  ambigu- 
ous, and  we  could  make  no  use  of  it  until  we  knew  whether 
"  larger  supply"  meant  a  larger  sum  total  of  water  or  a  larger 
flow  per  hour.     To  avoid  ambiguity  we  define  fund  and  flow 
as  follows : 

A  fund  is  quantity  or  value  pure  and  simple :   so  many 
dollars,  for  example. 
A  flow  is  so  many  dollars  per  hour,  day,  or  year. 

3.  To  form  a  conception  of  the  total  exchanges  of  a  coun- 
try or  other  social  organism,  we  must  first  conceive  of  all  the 
individuals  who  can  make  exchanges.      This  class  includes 
all  legal  persons  who  can  be  owners  of  property.     A  firm 
or  company  of  any  kind  must  be  considered  as  a  person  dis- 
tinct from  the  men  who  form  it.     For  example,  if  Brown  and 
Smith  are  in  partnership,  there  will  be  three  persons  among 
them,  the  firm  and  its  two  partners.      But  unless  the  combi- 
nation forms  a  separate  legal  person,  having  dealings  with  all 
its  members  individually,  it  is  not  to  be  considered  as  a  person. 
On  the  other  liand,  we  are  not  to  count  as  separate  persons 
those  who  do  not  do  business  on  their  own  account.     As  a 


IV.  4.]  THE  MONETARY  FLOW.  317 

general  rule,  husband,  wife  and  minor  children  will  all  together 
constitute  but  a  single  person.  In  fact,  any  body  of  people 
whose  separate  interests  do  not  concern  society  may  be  consid- 
ered as  a  single  economic  person  whenever  we  want  to  con- 
sider their  relations  to  the  rest  of  society. 

In  the  following  chapters  we  shall  graphically  represent  eco- 
nomic persons  by  small  circles. 

4.  Flow  of  the  Currency.  In  this  chapter  we  use  the 
word  "money"  in  its  widest  sense,  so  as  to  include  every- 
thing of  which  the  ownership  is  transferred  from  hand  to 
hand  in  payment  for  goods  or  services.  Let  us  consider  all 
the  money  paid  by  any  one  person.  To  do  this  we  record 
every  payment  that  he  makes,  and  write  down  its  amount  in 
a  column  of  an  account  book.  At  the  end  of  some  unit 
of  time,  say  a  year,  we  add  up  all  these  payments.  We 
shall  then  have  a  definite  sum,  expressing  all  the  payments 
of  that  particular  person  during  the  year.  Let  us  imagine 
this  sum  calculated  in  the  same  way  for  every  one  of  the  thou- 
sands or  millions  of  persons  who  make  up  the  social  organism. 
The  sum  total  will  express  the  amount  of  the  entire  payments 
within  the  organism  during  the  year.  This  sum  we  call  the 
flow  of  the  currency. 

Instead  of  considering  payments,  we  might  have  taken  the 
receipts  of  money.  Under  every  person's  name  we  should 
then  write  down  all  the  sums  of  money  paid  to  him.  The 
sum  at  the  end  of  the  year  would  express  the  total  annual 
payments  to  him,  and  this  sum  for  the  whole  community 
would  give  another  value  for  the  flow  of  the  currency.  If  we 
determined  the  flow  by  both  methods,  then,  since  every  pay- 
ment made  by  any  one  person  must  be  made  to  some  other 
person,  we  should  register  every  payment  twice,  once  under  the 
payer  and  once  under  the  payee.  Hence  we  should  get  the 
same  sum  total  of  the  flow  in  either  case. 

This,  however,  presupposes  that  we  include  no  payments 
made  to  or  from  foreign  persons,  or  persons  outside  the  or- 


318 


TUB  SOCIETART  CIRCULATION. 


[IV.  4. 


ganisin  under  consideration.  Sucli  payments  form  a  very  im- 
portant economic  factor ;  but  in  this  preliminary  discussion  we 
have  to  omit  them,  and  consider  only  internal  payments.  We 
may,  if  we  choose,  consider  all  the  persons  in  the  world  as 
forming  a  single  social  organism,  and  the  two  measures  of  the 
flow  will  then  always  balance. 


FIG.  1. 


The  conception  of  the  flow  of  the  currency  is  represented 
graphically  in  the  following  way :  We  draw  a  little  circle  for 
each  person  legally  capable  of  being  an  owner  of  wealth. 
Whenever  a  payment  of  money  is  made  we  suppose  it  to  pass 
from  the  circle  representing  the  payer  to  that  representing  the 
payee  through  a  little  vein.  This  vein  we  represent  by  a  line 
from  one  circle  to  the  other,  with  an  arrow-head  showing  the 


IV.  4.]  THE  MONETARY  FLOW.  319 

direction  of  the  payment.  These  veins  form  a  network  through 
which  we  suppose  the  money  to  be  flowing  from  person  to 
person.  This  continual  flow  of  money  from  owner  to  owner 
is  called  the  monetary  circulation. 

It  will  readily  be  seen  that  when  we  speak  of  a  flow  we 
introduce  a  conception  which  does  not  strictly  conform  to  the 
actual  case,  because  at  no  time  is  money  really  flowing  like  a 
fluid  from  person  to  person.  Excepting  such  cases  as  that  of 
transmission  by  mail,  money  is  always  in  possession  of  some 
one  person,  and  it  passes  from  one  person  to  another  in  -a 
moment  by  the  act  of  payment.  It  would  therefore  be  more 
exact  to  consider  the  circles  as  representing  reservoirs  of 
money,  and  the  motion  along  the  arrows  to  take  place  by  sud- 
den transfers  from  one  reservoir  to  another.  But  the  trans- 
fers have  the  same  result  as  a  flow,  and  a  certain  advantage 
is  gained  by  conceiving  of  the  money  as  regularly  flowing 
from  one  reservoir  to  the  other,  as  shown  by  the  arrows.  In 
fact,  the  familiar  words  "  currency"  and  "  circulation"  in  Eng- 
lish, and  the  yet  more  expressive  phrase  "argent  liquide" 
applied  by  the  French  to  ready  cash,  or  money  all  ready  to 
flow,  show  how  natural  the  conception  of  a  flow  of  money  is. 

We  may  imagine  that  on  each  connecting  vein  we  write 
down  the  amount  of  all  the  money  which  has  passed  along 
that  vein  in  the  course  of  the  year.  The  sum  total  of  all  the 
amounts  passing  from  any  one  person  will  be  his  total  payments, 
and  the  sum  of  all  the  amounts  passing  to  him  will  be  his  total 
receipts.  The  sum  of  all  the  numbers  written  down  upon  the 
veins  will  be  the  total  flow  of  the  currency.  The  amount  of 
this  flow  in  dollars  we  represent  by  the  symbol  F. 

The  general  rule  will  be  that  as  much  money  flows  from 
every  person  as  flows  to  him.  It  is  true  that  there  is  no  law 
against  a  man  collecting  as  much  money  as  he  chooses,  just  as 
he  would  collect  books  or  pictures.  Practically,  however,  he 
has  no  motive  to  collect  any  considerable  sum  of  money,  be- 
cause he  loses  interest  on  it  as  long  as  he  keeps  it.  Hence, 
as  a  matter  of  fact,  nearly  all  the  money  received  by  persons 


320  TUE  SOCIETARY  CIRCULATION.  [IV.  5. 

is  very  soon  paid  out  again  for  some  purpose.  To  tin's  rule, 
however,  there  are  two  important  exceptions,  that  of  banks 
and  that  of  the  government.  We  have  shown  that  banks 
can  create  money  in  the  form  of  credit.  The  stream  of  money 
may  therefore  flow  from  them  for  a  considerable  period  with- 
out any  stream  flowing  back.  "When  the  credits  are  paid  off  by 
their  debtors,  they  are  in  receipt  of  money  which  they  are  under 
no  legal  obligation  to  pay  out  again.  Still  we  shall  generally 
find  that  in  the  long-run  the  receipts  and  payments  will  near- 
ly balance  in  the  case  of  banks  as  in  other  cases.  In  the  case 
of  a  government,  payments  can  be  made  only  in  accordance 
with  certain  legal  forms,  and  there  can  be  no  assurance  that 
they  shall  exactly  balance  the  revenue.  Hence  large  sums  of 
money  may  be  collected  in  the  public  treasury  at  one  time,  to 
be  paid  out  at  another  time.  But  if,  instead  of  taking  a  single 
year,  we  take  a  generation,  the  account  of  receipts  and  pay- 
ments will  still  be  nearly  balanced. 

We  are  therefore  to  conceive  that  the  inflow  to  every  person  is 
equal  to  the  outflow  from  him.  But  it  does  not  follow  that 
the  number  of  streams  to  and  from  him  must  be  equal.  If  his 
sole  source  of  income  is  a  salary,  there  will  be  but  one  flow  of 
money  to  him,  namely,  that  coming  from  his  employer.  But 
from  him  there  will  be  currents  to  his  grocer,  his  baker,  his 
landlord,  his  tailor,  and  dozens  of  others  from  whom  he  buys. 
A  retail  tradesman  may  have  streams  flowing  to  him  from  hun- 
dreds or  even  thousands  of  customers,  while  the  streams  from 
him  may  be  no  more  numerous  than  in  the  case  of  his  salaried 
clerk. 

5.  Distinction  and  delation  between  the  Volume  and  the 
Flow  of  the  Currency.  We  have  to  make  in  currency  the  dis- 
tinction between  a  fund  and  a  flow,  the  logical  nature  of  which 
lias  been  already  pointed  out.  The  volume  of  the  currency  is  a 
fund.  On  our  diagram  the  volume  is  the  total  number  of  dol- 
lars flowing  through  the  network  at  any  moment.  If  we  in- 
troduce the  more  accurate  conception  of  each  person  as  a  reser- 


IV.  5.]  THK  MONETARY  FLOW.  321 

voir,  then,  since  the  reservoirs  contain  all  the  money  at  any 
one  moment,  we  should  say  that  the  volume  of  the  currency 
was  the  sum  total  contained  in  all  the  reservoirs  at  any  epoch, 
say  on  midnight  of  a  particular  day. 

The  method  of  determining  this  volume  has  already  been 
laid  down  (II.  96-98).  For  our  present  purpose  we  may  con- 
sider it  as  made  up  of  two  parts,  material  money  and  immate- 
rial money.  The  material  portion  consists  of  coin,  bank-notes, 
and  other  forms  of  credit  which  pass  from  hand  to  hand  without 
change  or  subdivision.  The  immaterial  portion  of  the  currency 
consists  of  bank  credits,  the  ownership  of  which  is  transferred  by 
cheques.  The  relations  between  the  volume  and  the  flow  of 
these  two  kinds  of  currency  have  to  be  considered  separately. 

Let  us  on  January  1st  fix  our  attention  on  a  dollar  bill.  "We 
shall  perhaps  see  this  bill  pass  from  a  young  man  to  a  confec- 
tioner in  exchange  for  ice-cream  ;  from  the  confectioner  it  passes 
to  the  grocer,  from  the  grocer  to  his  drayman,  and  so  on.  We 
may  imagine  it  passing  from  hand  to  hand  until  December 
31st.  If  we  count  up  the  number  of  times  the  bill  has  changed 
hands,  we  shall  have  the  contribution  to  the  flow  of  the  cur- 
rency made  by  that  particular  bill.  Adding  up  the  contribu- 
tions for  all  the  dollar  bills  in  circulation,  we  shall  have  the  sum 
total  of  their  contributions  to  the  flow  F.  In  the  case  of  the  five- 
dollar  bills  we  proceed  in  the  same  way,  but  multiply  the  num- 
ber of  transfers  by  5.  The  product  will  be  their  contribution 
to  F.  Doing  the  same  thing  for  the  ten-,  twenty-,  and  fifty- 
dollars  bills,  and  for  all  the  gold  and  silver  pieces  in  circulation, 
we  shall  have  that  portion  of  F  due  to  the  circulation  of  ma- 
terial money.  Let  us  call  this  sum  total  F'.  If  we  divide  F' 
by  the  sum  total  of  all  the  bills  and  pieces  of  coin  in  circula- 
tion, we  shall  have  the  average  number  of  times  which  mate- 
rial money  changes  hands  in  the  course  of  the  year.  Divid- 
ing the  365  days  of  the  year  by  this  number,  we  shall  have 
the  average  number  of  days  which  money  remains  in  one  man's 
hands. 

It  follows  that  if  nothing  but  a  fixed  number  of  pieces  of 
21 


322  TUR  SOCIETART  CIRCULATION.  [IV.  5. 

material  money  were  in  circulation  in  a  community,  we  could 
obtain  the  annual  flow  of  the  currency  in  a  third  way,  as  follows : 

Multiply  the  denomination  of  every  piece  of  money  "by  the 
number  of  times  it  changes  hands  in  a  year.  We  shall  then 
have  as  many  products  as  there  are  pieces  of  money.  The 
sum  of  all  these  products  will  le  the  flow  of  the  currency. 

Let  us  see  now  how  this  conception  is  to  be  modified  in  the 
case  of  bank  credits.  As  already  shown,  these  credits  are  not 
material  money,  but  consist  simply  in  rights  to  money,  which 
are  represented  by  writing  certain  figures  in  the  books  of  the 
bank.  Yet  they  form  a  part  of  the  volume  of  the  currency. 
But  we  cannot  separate  them  into  individual  dollars  so  clearly 
as  we  can  the  bank-notes.  The  results,  however,  do  not  offer 
any  immediate  difficulty.  Every  bank  cheque  drawn  by  A  in 
favor  of  B  is  a  contribution  to  the  flow  F ;  if  B  passes  this 
cheque  to  C  in  payment  of  a  debt,  the  cheque  is  again  added  to 
the  flow.  Moreover,  it  is  only  so  far  as  the  bank  credit  is  thus 
transferred  by  means  of  cheques  that  it  has  anything  to  do  with 
the  flow.  If  then  we  call  the  sum  total  of  payments  by  cheque 
F",  we  shall  have 

Total  flow  of  the  currency  =  F  =  F'  -f  F". 

If  we  call  the  average  volume  of  bank  credits  or  deposits 
D,  then  dividing  F*  by  D,  we  shall  have  the  average  number  of 
times  which  a  dollar  of  bank  credit  changes  hands  in  the  course 
of  the  year,  and  hence  we  can  determine  the  average  length  of 
time  which  it  remains  in  any  one  person's  hands. 

We  have  now  two  quantitative  conceptions  before  us:  a  sum 
total  of  payments,  F,  and  the  total  volume  of  currency,  which 
we  shall  call  "V,  by  which  these  payments  are  made.  It  may 
perhaps  give  precision  to  these  conceptions  if  we  compare  them 
with  that  of  the  circulation  of  blood  in  the  body.  The  body  of 
an  adult  man  contains  a  certain  number  of  pints  of  blood.  If 
we  keep  an  account  of  all  the  blood  which  flows  into  any  one 
organ  or  part  of  the  body,  the  forefinger  for  example,  in  the 
course  of  one  day,  we  shall  have  the  circulation  of  that  finger. 
Since  the  same  blood  may  flow  in  over  and  over  again,  and  must 


IV.  5.]  THE  MONETARY  FLOW.  323 

be  counted  every  time,  the  circulation,  even  for  the  forefinger, 
may  be  expressed  by  a  greater  sum  total  than  the  entire  volume 
of  blood  in  the  body.  Moreover,  this  circulation  C  will  be 
greater  the  greater  the  time  we  take,  being  sixty  times  as  great 
for  one  hour  as  for  one  minute,  and  twenty-four  times  as  great 
for  a  day  as  for  an  hour.  If  we  add  up  C  for  every  organ  in 
the  body,  we  shall  have  the  total  flow  of  blood  for  one  day. 
Dividing  this  total  flow  by  the  entire  volume  of  the  blood,  we 
shall  have  the  average  number  of  times  which  the  blood  circu- 
lates in  the  course  of  the  day. 

This  analogy  must  not,  however,  be  carried  too  far.  Blood 
circulates  by  being  always  carried  back  to  one  central  point, 
whereas  money  is  not  so  carried,  but  may  only  pass  from  hand 
to  hand  without  end.  If  we  wish  the  analogy  to  correspond 
more  exactly,  we  must  suppose  that  to  the  circulation  of  a  single 
molecule  of  blood  from  the  heart  to  any  organ  and  back  again 
corresponds  the  passage  of  a  unit  of  money  from  one  person  to 
another. 

Let  us  now  state  the  algebraic  relation  between  the  volume 
of  currency  V  and  the  flow  F.  This  relation  is  expressed  by 
saying  that  F  is  equal  to  Y  multiplied  by  the  average  number 
of  times  which  each  unit  of  money  changes  hands  in  the  course 
of  a  year.  "We  may  use  the  algebraic  notation  : 

R',  the  average  number  of  times  a  material  dollar  changes 
hands  in  a  year  ; 

R",  the  average  number  of  times  for  a  bank  credit  ; 

R,  the  same  average  for  the  whole  volume  of  currency.  If 
this  number  R,  which  we  call  rapidity  of  circulation,  is  fixed 
—  that  is,  if  money  always  circulates  with  the  same  average 
rapidity  —  then  the  relation  between  F  and  V  is  fixed  and  defi- 
nite, and  one  cannot  be  increased  without  increasing  the  other 
also.  We  therefore  have  between  the  volume,  flow,  and  rapid- 
ity of  circulation  the  equation 


which  is  the  fundamental  equation  required. 


324  TUB  SOCIETARY  CIRCULATION.  [IV.  6. 

0.  Wo  now  have  to  consider  whether  there  is  any  law  which 
fixes  the  number  of  times  R  that  each  dollar  can  change  hands 
in  a  year,  or,  what  amounts  to  the  same  thing,  whether  there 
is  any  law  which  determines  how  long  a  dollar  shall  remain 
on  the  average  in  any  one  man's  hands.  A  little  consideration 
will  show  us  that  although  this  last  period  is  not  fixed  by  any 
precise  law,  being  subject  to  changes  through  the  action  of 
various  causes,  yet  it  can  only  change  between  very  narrow 
limits. 

If  every  man  could  pay  out  his  money  the  instant  he  got  it, 
the  time  between  two  payments  would  be  very  short.  But 
as  a  matter  of  fact  he  must  in  general  keep  more  or  less  of 
his  money  a  certain  period  before  he  can  advantageously  spend 
it.  If  he  receives  a  salary  payable  at  the  end  of  every  month, 
he  probably  pays  a  moderate  grocery  bill  at  once,  and  keeps 
the  rest  of  his  money  to  spend  from  time  to  time  uniformly 
throughout  the  month.  If  he  owes  one  half,  but  pays  out  the 
other  half  at  a  uniform  rate,  then  the  average  time  which  his 
money  stays  in  his  hands  is  a  quarter  of  the  month.  In  a  com- 
munity of  such  men,  such  pieces  of  money  would  change 
hands  forty-'eight  times  in  the  course  of  a  year.  The  change 
of  hands  is  made  with  greater  rapidity  the  higher  we  go  in 
the  financial  scale.  As  a  general  rule  every  man  feels  that 
he  is  losing  possible  interest  on  his  money  by  keeping  it,  and 
therefore  tries  to  pay  it  out  for  something  as  soon  as  he  ad- 
vantageously can.  The  larger  and  wider  the  transactions  in 
which  he  is  engaged  the  better  he  can  manage  this,  and  there- 
fore the  quicker  he  can  pass  his  money.  It  would  probably 
be  found  that  among  the  brokers  on  "Wall  Street  every  dollar 
changes  hands  at  least  once,  and  possibly  a  number  of  times,  in 
the  course  of  a  day. 

It  might  seem  at  first  sight  that  the  causes  which  determine 
how  long  a  single  dollar  will  remain  in  one  man's  hands  must 
be  so  exceedingly  transitory  and  variable  that  no  average  time 
can  be  fixed.  This  conclusion  would  be  correct  if  we  were  re- 
quired to  consider  the  time  sought  as  an  absolutely  fixed  math- 


IV.  6.]  THE  MONETARY  FLOW.  325 

ematical  quantity.  But  although  the  quantity  cannot  be  thus 
absolutely  fixod,  the  conditions  of  society  are  such  that  the  law 
of  averages  prevails  with  a  near  approach  to  rigor.  The  aver- 
age length  of  time  which  a  dollar  remains  in  one  man's  hands 
is  fairly  definite  when  we  take  the  average  of  millions  of  peo- 
ple, each  using  hundreds  of  dollars.  At  the  same  time  it  is 
liable  to  change  by  the  action  of  any  cause,  however  slight, 
which  affects  the  transactions  of  the  whole  community  in  the 
same  way.  There  are,  as  we  shall  presently  show,  certain 
causes  which  accelerate  the  passage  of  money  from  hand  to 
hand,  and  there  are  certain  conditions  under  which  this  passage 
is  retarded  and  money  is  kept  longer  in  people's  hands. 

ILLUSTRATION  AND  QUESTION. 

1.  'An  example  of  confusion  between  the  ideas  of  a  fund  and  a  flow  is 
found  in  the  discussion  of  one  of  the  most  celebrated  economical  theories  of 
modern  times,  that  of  the  "  wage- fund."    This  theory  asserted  that  the  sum 
total  of  money  in  a  country  available  for  the  payment  of  wages  was  limited 
and  definite  in  amount,  a  statement  in  itself  quite  correct.     Hence  it  was 
concluded  that  wages  could  be  increased  only  by  increasing  this  amount. 
It  was  thus  supposed  that  there  was  a  certain  relation  by  virtue  of  which  the 
amount  of  wages  depended  upon  the  amount  of  the  wage-fund.    But  a  very 
little  consideration  will  show  us  that  no  such  relation  could  exist,  any  more 
than  the  flow  of  water  over  a  dam  could  be  determined  by  the  amount  of 
water  in  the  mill-pond.    No  matter  how  vast  the  fund,  it  would  in  time  be  all 
absorbed  in  the  payment  of  wages  ;  then,  were  the  fund  never  replenished, 
no  more  wages  could  be  paid,  and  society  would  come  to  an  end.     The  fund 
must  therefore  be  continually  replenished.    Now,  this  being  so,  the  pay- 
ment of  the  wages  depends,  not  upon  the  magnitude  of  the  fund,  but  upon 
the  rate  at  which  it  is  replenished.     This  rate  is  not  a  fund  at  all,  but  a 
flow.     It  bears  the  same  relation  to  a  fund  that  a  flow  of  so  many  gallons 
per  hour  does  to  a  reservoir  holding  so  many  gallons  of  water. 

2.  Adding  up  all  the  bank  cheques  drawn  in  a  community  during  a 
month,  it  is  found  that  they  amount  to  twenty  millions  of  dollars.    If  each 
cheque  were  paid  by  the  drawee  to  a  third  person,  who  collected  it,  what 
would  be  Ihe  total  contribution  made  by  these  cheques  to  the  monetary 
flow?    If  the  bank  deposits  averaged  five  millions  of  dollars,  what  would 
be  the  annual  rapidity  of  circulation  for  the  bank  credits?    Note  that  we 
do  not  count  the  deposit  of  money  in  a  bank  as  part  of  the  monetary  flow. 


T1IE  SOCIETART  CIRCULATION.  [IV.  7. 

CHAPTER  II. 

THE    EQUATION   OF    8OCIETAKY   CIRCULATION. 

7.  IN  the  preceding  chapter  we  considered  the  total  pay- 
ments  of  money  from  person  to  person  in  a  social  organism. 
Now,  considering  only  the  cases  which  come  under  economic 
principles,  each  of  these  payments  was  made  in  exchange  for 
something  transferred  from  the  payee  to  the  payer.  This 
something  may  be  either  material  wealth  already  in  the  posses- 
sion of  the  payee,  or  it  may  be  a  service  involving  labor  on  the 
part  of  the  payee.  When  one  hires  a  laborer  to  work  for  him, 
he  receives  in  return  a  service  consisting  of  the  results  of  the 
man's  labor.  If  he  buys  a  pound  of  tea  at  his  grocer's,  he  re- 
ceives the  tea  in  exchange  for  his  money.  Hence,  as  already 
remarked,  to  every  flow  of  currency  from  one  person  to 
another  corresponds  a  reverse  flow  of  wealth  or  services  from 
the  second  person  to  the  first.  The  total  circulation  consists, 
therefore,  of  two  combined  circulations  equal  and  opposite 
to  each  other,  the  one  of  some  form  of  current  money,  the 
other  of  some  object  of  desire,  the  product  of  human  labor. 
To  distinguish  these  two  we  shall  call  the  latter  the  industrial 
circulation. 

The  same  diagram  which  represents  the  monetary  circulation 
may  also  be  considered  to  represent  the  industrial  circulation, 
the  latter  flowing  in  the  opposite  direction  from  that  of  the 
arrows,  but  along  the  same  veins. 

We  shall  use  the  term  societary  circulation  to  designate 
these  two  opposite  circulations. 

We  have  shown  that  it  is  the  industrial  circulation  alone 
which  really  supplies  the  wants  of  the  community.  Were  it 
possible  to  keep  up  the  industrial  circulation  without  the  use 
of  money,  men's  wants  would  be  supplied  -just  as  they  are 
(EL  53). 


IV.  8.]    THE  EQUATION  OF  SOCIBTART  CIRCULATION.     327 

Since  we  cannot  possibly  keep  up  the  industrial  circulation 
without  the  other,  it  might  seem  idle  to  point  out  this  fact,  but 
the  understanding  of  the  fact  is  conducive  to  sound  thinking 
on  the  subject.  The  public  are  prone  to  assume  that  the  sup- 
ply of  their  wants  depends  altogether  on  keeping  up  the  mone- 
tary circulation,  regardless  of  the  industrial  circulation,  and 
bad  policies  are  therefore  urged  upon  governments.  The 
lesson  to  be  drawn  from  the  fact  is  this :  The  influence  of 
changes  in  the  monetary  circulation  upon  the  well-being  of 
the  community  is  to  be  determined  by  their  effects  upon  the 
industrial  circulation. 

8.  Our  first  proposition  concerning  the  industrial  circula- 
tion defines  its  amount.  If  we  include  in  this  circulation  every 
transfer  of  commodities  or  services  for  which  money  is  paid, 
or  to  be  paid,  and  no  others,  then  its  value  will  necessarily  be 
equal  to  the  flow  of  the  currency,  this  flow  having  been  defined 
as  the  sum  total  of  money  payments.  But  to  preserve  the 
equality  we  must  exclude  from  the  monetary  flow  all  such 
transfers  as  loaning  money,  or  depositing  it  in  a  bank,  because 
these  are  not  balanced  by  reverse  transfers  of  wealth  or  ser- 
vices. Then,  keeping  the  two  flows  in  correspondence  with 
each  other,  the  flow  of  the  currency  must,  in  the  long  run, 
remain  equal  to  the  total  value  of  the  industrial  circulation  as 
measured  in  money. 

Of  course  this  measure  is  subject  to  the  general  laws  of 
measurement  already  developed,  according  to  which  the  numeri- 
cal value  of  any  fixed  quantity  varies  inversely  as  the  measur- 
ing unit.  Hence,  with  every  change  in  the  absolute  value,  or 
"  purchasing  power,"  of  the  dollar,  there  will,  all  other  condi- 
tions being  equal,  be  an  inverse  change  in  the  money  measure 
of  a  fixed  industrial  circulation.  This  measure  will  therefore 
var}r  directly  as  the  scale  of  prices.  Hence,  in  accordance 
with  the  mathematical  principle  already  illustrated,  the  money 
value  of  a  fixed  industrial  circulation  will  be  equal  to  some 
quantity  multiplied  into  the  scale  of  prices.  The  quantity 


S28  TUB  SOCIETAR7  CIRCULATION.  [IV.  0. 

to  bo  multiplied  is  simply  the  value  of  the  industrial  circula- 
tion as  it  would  be  on  the  scale  of  prices  which  we  assume  as 
the  unit  of  comparison.  Thus  in  III.  11  we  assumed  the  scale 
of  prices  in  the  year  1880  as  the  unit,  and  found  certain  other 
scales  for  other  years.  If  then  we  put  K  for  the  industrial 
circulation  on  the  scale  of  prices  which  we  take  as  unity,  and 
if  we  put  P  for  the  actual  scale  as  found  from  the  table  of 
prices,  then  the  money  value  of  the  total  industrial  circulation 
will  be  K  X  P. 

From  what  lias  already  been  said,  this  product  is  the  same  as 
the  flow  of  the  currency ;  hence,  using  the  notation  already 
given,  in  which  that  flow  is  Y  X  R,  we  have  the  equation 

V  X  R  =  K  X  P, 
which  may  be  called  the  equation  of  societary  circulation. 

This  equation  may  be  regarded  as  the  fundamental  one  in 
the  theory  of  exchanges.  To  the  non-mathematical  reader  a 
further  explanation  of  its  significance  may  be  needful.  The 
first  member,  V  X  R5  assumes  the  very  obvious  fact  that  the 
total  money  value  of  the  exchanges  which  will  be  effected  in 
a  year  by  a  number  V  of  dollars  is  eqiial  to  Y  multiplied  by 
the  average  number  of  times  which  a  dollar  changes  hands 

O  w  CJ 

during  the  year.  The  other  member  of  the  equation,  K  X  P, 
implies  that  the  total  money  value  of  the  wealth  and  services 
which  these  payments  balance  increases  with  the  scale  of 
prices,  and  with  the  quantities  of  wealth  exchanged ;  so  that 
when  either  of  these  factors  increases,  V  X  K  must  increase 
in  the  same  proportion. 

9.  The  next  proposition  is  that  the  quantity  K,  which  rep- 
resents the  industrial  circulation  as  measured  by  the  unit  scale 
of  prices,  also  represents,  with  some  slight  modifications,  the 
sum  total  of  the  necessary  operations  of  the  social  organism,  so 
far  as  these  operations  consist  in  the  transfer  of  goods  and  the 
rendering  of  services.  To  show  how  this  is,  and  what  it  means, 
let  us  take  some  continuous  series  of  those  operations.  Our  old 
history  of  the  coat  will  serve  for  this  purpose.  "We  wish  to 


IV.  9.]   THE  EQUATION  OF  SOCIETARY  CIRCULATION.      329 

learn' what  flow  of  the  currency  was  caused  by  the  various  pro- 
cesses of  transportation  and  manufacture  to  which  it  was  sub- 
ject. Commencing  with  the  sheep  on  the  prairie,  the  first 
industrial  operation  was  that  of  tending  and  shearing  the  sheep. 
The  measure  of  this  industrial  operation  was  the  money  paid 
by  the  owner  of  the  sheep  to  his  employes  for  their  work, 
which  money  payment  counts  as  a  part  of  the  flow  of  the  cur- 
rency. The  next  industrial  operation  we  may  conceive  to  have 
been  the  transportation  of  the  wool  to  Chicago  by  rail.  This 
was  balanced  by  a  flow  of  the  currency  from  the  sheep-owner 
to  the  railway  company.  Arriving  in  Chicago,  the  ownership 
of  the  wool  passed  to  the  wool-merchant,  and  was  balanced  by 
a  flow  of  the  currency  from  the  wool-merchant  to  the  owner. 
By  a  succession  of  such  operations  the  wool  reached  a  factory, 
and  eacli  operation  was  balanced  by  a  flow  of  currency.  In 
the  factory  operatives  rendered  service  in  manufacturing  the 
wool  into  cloth,  which  service  was  balanced  by  a  flow  from  the 
owners  of  the  factory  to  the  operatives.  As  the  ownership  of 
the  cloth  passed  successively  to  the  wholesale  dealer,  to  the 
tailor,  and  the  owner  of  the  coat,  every  transfer  was  balanced 
by  a  flow  of  currency  between  the  same  parties  in  the  opposite 
direction.  The  same  thing  is  evidently  true  of  all  industrial 
operations.  For  every  such  operation  there  is  a  corresponding 
flow  of  the  currency. 

"We  are  mainly  concerned  with,  the  converse  proposition 
that,  omitting  exceptional  cases  to  be  considered  presently, 
every  money  payment  is  made  to  facilitate  the  progress  of 
goods  or  services  from  those  who  own  or  render  them  to  those 
who  want  them.  This  follows  from  the  general  principle  that 
no  one  pays  out  his  money  unless  he  receives  an  equivalent, 
and  that  he  always  pays  it  in  such  a  manner  as  to  get  the  great- 
est equivalent  he  can  command.  Hence,  as  a  general  rule, 
payments  of  money  are  made  only  for  the  services  which  they 
can  most  advantageously  command,  and  every  money  payment 
is  balanced  by  a  corresponding  transfer  of  services  of  some 
kind. 


330  TUE  SOCIETARY  CIRCULATION.  [IV.  10. 

1O.  A  third  principle  touching  the  industrial  circulation  is 
that  there  is  a  certain  amount  of  that  circulation  which  is  most 
conducive  to  human  well-being.  To  show  what  this  maximum 
is,  let  us  commence  with  a  simple  example.  Here  is  a  shoemaker 
who  has  a  wife  and  two  children  to  support.  He  can  work  a 
certain  number  of  hours  in  the  day,  six  or  eight  perhaps,  with 
positive  pleasure  to  himself.  Work  beyond  these  hours  grad- 
ually becomes  more  and  more  irksome.  The  first  additional 
hour  he  will  think  little  of,  the  second  he  will  have  more  aver- 
sion to,  the  third  yet  more,  and  so  on.  A  point  will  at  length 
be  reached  when  he  cannot  work  longer  unless  at  the  expense 
of  his  health. 

Now,  under  the  laws  of  demand  and  supply,  he  can  obtain  a 
certain  amount  of  sustenance  with  his  eight  hours  of  agreeable 
labor.  If  this  sustenance  is  all  his  family  want,  the  problem  of 
his  existence  will  be  a  very  simple  one.  But  we  may  be  sure  it 
is  not  all  they  want.  If  it  suffices  to  give  them  cotton  curtains 
to  their  windows,  they  will  want  lace ;  they  will  want  the  choice 
cuts  of  beef  rather  than  the  coarser  ones;  and  the  wife  will 
want  to  hire  a  seamstress  instead  of  mending  the  clothes  her- 
self. The  man  will  therefore  certainly  work  a  little  more  than 
the  number  of  hours  agreeable  to  him.  The  limit  of  advanta- 
geous working  is  reached  when  the  additional  sustenance  which 
he  can  obtain  by  additional  work  will  not  compensate  for  the 
irksomeness  of  the  labor.  At  this  point  he  will  stop  working 
of  his  own  accord.  For  the  number  of  hours  up  to  this  limit 
he  can  command  a  certain  amount  of  money  yearly.  This 
amount  will  be,  so  far  as  he  is  concerned,  the  most  advanta 
geous  flow  of  the  currency  from  his  customers  to  him.  If  he 
works  longer,  the  irksomeness  of  the  labor  will  more  than  bal- 
ance the  benefit  derived  through  the  additional  monetary  flow. 

"What  is  true  of  this  shoemaker  is  true  of  everybody. 
There  is  a  certain  maximum  amount  of  labor  which,  whether 
applied  to  production  or  exchange,  cannot  be  exceeded  with- 
out disadvantage  to  the  individual.  Every  man  must  be 
his  own  judge  of  this  maximum,  because  it  depends  upon  his 


IV.  10.]  THE  EQUATION  OF  SOCIETAR7  CIRCULATION.     331 

health,  habits,  the  wants  of  his  family,  and  his  own  desire  for 
wealth.  We  may  therefore  regard  the  flow  of  the  currency 
as  measuring,  in  the  normal  state  of  society,  that  particular 
amount  of  industrial  circulation  which  on  the  whole  is  most 
conducive  to  the  enjoyment  and  well-being  of  the  community. 

It  is  true  that  this  proposition  runs  counter  to  current  no- 
tions. The  popular  opinion  is  that  almost  every  man  in  the 
community  wants  more  employment  than  he  can  get.  Mer- 
chants are  sorry  when  business  is  dull,  and  glad  when  it  is  so 
brisk  that  they  have  hard  work  to  keep  up  with  it.  Laborers 
are  often  out  of  employment  entirely,  although  they  profess 
their  willingness  to  work  for  even  lower  wages  than  the  pro- 
ducts of  their  work  ought  to  entitle  them  to  command.  But  a 
fallacy  underlies  these  conclusions.  The  fact  is  that  the  aver- 
age man  does  not  want  to  do  any  more  work  than  he  does. 
Many  laborers  desire  laws  to  prevent  them  working  more  than 
eight  hours  a  day.  What  everybody  wants  is,  not  to  render 
more  service,  but  to  get  more  pay  for  that  which  he  does  ren- 
der, which  is  a  very  different  thing.  That  is  to  say,  he  does 
not  wish  to  increase  his  part  of  the  industrial  circulation,  but 
he  does  want  to  increase  the  flow  of  currency  to  him  which 
should  balance  his  contribution  to  the  industrial  circulation. 
In  other  words,  he  wants  to  establish  a  higher  scale  of  prices 
for  his  services.  The  greater  the  demand  the  higher  the  price 
he  can  charge.  Hence  his  desire  for  increased  demand. 

The  wish  for  high  prices  being  entertained  by  all  men,  there 
is  a  force  akin  to  pressure  tending  to  make  the  scale  of  prices 
as  high  as  possible.  Now,  the  very  fact  of  this  pressure  re- 
acts upon  the  circulation  itself.  Bearing  in  mind  the  proposi- 
tion already  reached,  that  every  transfer  must  be  balanced  by 
a  corresponding  payment,  it  follows  that  there  cannot  be  any 
greater  industrial  circulation  than  that  measured  by  the  flow 
of  the  currency.  But  the  higher  the  scale  of  prices  the  less 
industrial  circulation  a  given  flow  will  measure.  In  other 
words,  in  our  equation,  if  we  suppose  V  X  R  to  be  fixed, 
then  K  X  P  must  be  fixed  ;  so  that  the  larger  we  make  P  the 


THE  SOCIETART  CIRCULATION.  [IV.  11. 

smaller  must  be  K.  Hence  the  combined  efforts  of  every 
man  to  command  as  high  a  price  as  he  can  for  his  services 
may  result  in  himself  or  some  one  else  not  being  able  to  con- 
tribute his  normal  amount  to  the  industrial  operations  of  the 
social  organism. 

11.  Exceptions  to  the  Equation  of  Societary  Circulation. 
With  every  such  general  proposition  of  economics  as  this,  we 
are  to  consider  to  what  limitations  and  modifications  it  is  sub- 
ject. The  first  and  most  obvious  limitation  is  that  the  act  of 
incurring  debts  prevents  it  from  being  necessarily  fulfilled  at 
all  times.  When  a  debt  is  incurred,  a  transfer  forming  a  part 
of  the  industrial  circulation  is  made  without  any  corresponding 
transfer  of  money  in  the  other  direction.  If  the  debt  is  not 
paid  during  the  year,  we  shall  find  in  the  sum  total  of  the  in- 
dustrial circulation  certain  transfers  which  are  not  balanced  by 
the  societary  circulation.  But  since,  as  a  rule,  the  debt  is  paid 
at  some  time,  it  follows  that  in  the  long-run  the  balance  will  be 
made  good.  Moreover,  taking  each  year  by  itself,  the  chances 
are  that  the  excess  of  industrial  circulation  arising  in  this  way 
towards  the  end  of  the  year  will  be  balanced  by  the  payment 
of  debts  incurred  during  the  year  before. 

It  may  be  truly  said  that  in  cases  of  bankruptcy  the  payment 
is  never  made.  If,  then,  we  are  to  be  quite  strict,  we  should  add 
to  that  side  of  the  equation  which  represents  the  societary  cir- 
culation a  certain  quantity  indicating  the  loss  from  bankruptcy. 
The  render  can  do  this,  if  he  chooses,  by  writing  the  equation  in 
the  form 

K  X  P  =  V  X  R  +  B; 
B  representing  the  loss  by  bankruptcy. 

This  modification  would  not  materially  affect  the  conclusions 
drawn  from  the  equation,  and  therefore  need  not  be  further 
considered. 

It  may  also  happen  that  two  persons,  A  and  B,  have  made 
a  direct  exchange  of  goods  and  services,  and  that  the  only 
money  that  passes  between  them  is  a  balance  due  from  one 


IV.  11.]  THE  EQUATION  OF  SOCIETART  CIRCULATION.     333 

to  the  other.  Then  there  would  be  a  portion  of  the  industrial 
circulation  not  balanced  by  a  flow  of  currency.  As  a  general 
rule,  however,  money  passes  between  any  two  parties  only  in 
one  direction  at  any  one  time.  That  is,  if  A  buys  from  B, 
and  B  from  A,  it  will  commonly  happen  that  A  pays  B  and 
B  pays  A  separately.  Practically  the  cases  are  too  few  to  be 
of  any  importance,  the  flows  of  money  between  any  two  per- 
sons being  generally  in  one  way  only,  and  of  commodities  the 
other  way.  To  include  this  exceptional  case  we  have  only  to 
draw  two  veins  between  the  circles  representing  the  persons. 

The  opposite  result  occurs  in  great  speculative  transactions. 
In  the  Chicago  markets  the  ownership  of  large  quantities 
of  wheat  may  at  various  times  pass  back  and  forth  between 
parties,  either  with  or  without  corresponding  direct  payments. 
So  also,  in  New  York,  speculative  sales  of  railway  and  other 
shares  are  made  on  a  large  scale.  For  reasons  which  will  be 
presently  shown,  such  sales,  and  the  payment  made  for  them, 
should  be  excluded  from  our  sums  total. 

Yet  another  disturbance  of  the  equation  arises  when  A  pur- 
chases from  B,  and  B  from  C,  and  A  pays  C  directly,  and  thus 
cancels  both  debts  with  one  payment.  To  represent  all  the 
transactions,  such  a  payment  should  be  counted  as  made  from  A 
to  B  and  again  from  B  to  C,  and  the  veins  should  be  drawn 
accordinglv. 

O    v 

Yet  another  partial  exception  to  the  equation  occurs  in  the 
collection  of  government  revenues.  When  government  col- 
lects a  tax  from  the  people,  there  might  appear  to  be  no  in- 
dustrial flow  back  to  the  taxpayers  to  balance  the  monetary 
flow  embodied  in  the  tax.  We  may,  however,  consider  the 
general  benefit  rendered  by  the  government  as  such  an  indus- 
trial flow,  and  then  the  balance  will  hold  good.  But  if  govern- 
ment borrows  money,  there  is  no  flow  of  services  from  the 
government  to  the  borrower.  When,  year  after  year,  the  gov- 
ernment slowly  pays  off  the  debt,  there  is  no  industrial  flow 
from  the  bond-holder  to  the  government.  These  cases  consti- 
tute another  general  exception  to  the  equation.  The  same  ex- 


SOCIBTAR7  CIRCULATION.  [IV.  12. 

ception  arises  whenever  a  flow  of   currency  consists  in  bor- 
rowing money  to  be  subsequently  repaid. 

For  the  most  part  these  exceptional  cases  do  not  need  to  be 
treated  in  connection  with  the  main  principles  of  the  subject. 
Onr  proper  course  is  first  to  consider  the  action  of  cause  and 
effect  as  it  would  be  were  the  balance  of  the  two  flows  always 
perfect,  and  afterwards  to  consider,  so  far  as  may  be  necessary, 
what  disturbance  or  change  is  produced  in  the  exceptional  cases. 

12.  Illustrations  of  the  Societary  Circulation.  In  the 
graphic  representation  of  the  monetary  flow  already  given, 
each  separate  person  was  separately  represented.  But  in 
considering  the  action  of  economic  causes  upon  classes  of 
men,  we  cannot  consider  each  individual  separately,  but  have 
to  treat  whole  classes  together.  For  example,  we  may  con- 
sider all  the  shoemakers  in  a  city,  in  the  country,  or  in  the 
world,  represent  them  by  a  circle,  and  then  suppose  a  flow 
of  money  to  them  and  another  from  them.  The  flow  to  them 
will  consist  of  all  the  payments  made  for  the  purchase  of  shoes ; 
the  flow  from  them  will  consist  of  their  payments  for  leather 
and  other  capital,  and  for  their  own  sustenance.  We  may 
also  consider  our  class  to  include  the  whole  body  of  men  en- 
gaged in  producing  anything  to  be  made  into  shoes — shoe- 
dealers,  leather-makers,  and  even  the  raisers  of  the  cattle 
whose  hides  went  into  the  leather.  If,  however,  we  wish  to 
consider  the  separate  relations  of  these  classes,  we  may  sub- 
divide them  to  any  extent,  and  have  different  classes  for  the 
shoemakers,  the  shoe-dealers,  the  tanners,  and  so  forth. 

On  this  system  let  us  represent  graphically  the  operation  of 
levying  a  tax  in  order  to  pay  off  a  debt  due  the  public  creditors. 
We  draw  one  circle  to  represent  the  public  treasury ;  another 
circle,  which  we  cajl  society,  represents  the  totality  of  .the 
taxpayers,  bond-holders  excepted ;  a  third  circle  represents 
the  bond-holders  or  public  creditors.  We  draw  a  vein  from 
society  to  the  public  treasury,  showing  the  flow  of  money 
from  the  people  to  the  government,  in  payment  of  the  tax. 


IV.  12.]  THE  EQUATION  OF  SOCIETART  CIRCULATION.     335 

"We  draw  a  second  vein  from  the  public  treasury  to  the  bond- 
holder, showing  the  payment  to  them  to  extinguish  the  debt. 
But  the  operation  is  not  complete 
until  the  money  gets  back  into  the 
possession  of  society  at  large.  If 
the  bond-holders  spent  the  money 
for  miscellaneous  purposes,  it  would 
go  directly  to  society  at  large,  and 
we  should  draw  a  third  vein,  when 
the  circuit  would  be  complete.  This 
is  shown  in  Fig.  2. 

But  suppose  the  bond-holders  spend  the  money  in  building 
a  railway.  Since  railways  are  built  only  by  certain  special 
classes  of  people,  we  may  consider  their  functions  as  separate 
from  those  of  society  in  general.  The  circulation  will  then  be 
as  in  Fig.  3.  Here  the  stream  subdivides.  One  branch  goes 
directly  or  indirectly  to  the  laborers  who  excavate  the  road. 


FIG.  2. 


Fio.  3. 


Another  portion  goes  to  steel-makers  who  furnish  the  rails. 
A  third  goes  to  lumbermen  who  supply  the  ties.  The  fourth 
we  may  consider  as  going  to  unenumerated  classes  of  people,  a 
part  of  society  at  large.  Thus  we  have  four  flows,  a,  5,  c,  d, 
going  from  the  bond-holders  which  are  together  equal  to  the 
one  flow  from  the  public  treasury.  As  represented  in  the  dia- 


THE  SOCIETART  CIRCULATION. 


[IV.  12. 


grain,  two  flows  go  from  the  steel-makers,  one  to  society  at 
large,  and  one  to  the  owners  of  iron  ore. 

All  the  other  flows  we  draw  to  society.  Thus,  taking  the 
classification  we  have  given,  the  single  flow  of  money  which 
went  into  the  public  treasury  returns  in  five  different  streams. 
Of  course,  by  subdividing  the  streams  still  further,  we  might 
have  had  a  thousand  or  ten  thousand  return  flows ;  but  in  any 
case  their  sum  total  would  have  been  equal  to  the  outflow  of 
taxes,  or,  to  speak  more  exactly,  equal  to  the  flow  from  society 
into  the  treasury  of  that  portion  of  the  tax  used  in  paying  off 
the  bond-holders. 

As  another  illustration,  let  us  draw  a  diagram  representing 
the  flow  of  the  rents  paid  to  a  landlord  by  his  tenants,  in 


FIG.  4. 


case  the  landlord  spends  one  portion  of  his  rents  for  his  own 
support  and  the  remainder  in  building  new  houses.  The 
tenants  derive  their  income  by  rendering  services  to  soci- 
ety at  large,  no  matter  what  particular  persons.  The  flow  of 
those  particular  moneys  paid  for  rents  is  represented  by  the 
vein  from  society  to  the  tenants.  That  portion  of  the  land- 
lord's income  which  he  spends  for  his  own  sustenance  is  repre- 
sented by  the  vein  c  drawn  from  him  to  society  at  large.  But  in 
building  houses  he  employs  bricklayers,  carpenters,  painters, 
lumbermen,  and  so  forth.  If  we  include  the  lumbermen  with 


IV.  12.]    THE  EQUATION  OF  SOCIETART  CIRCULATION.    337 

the  carpenters,  the  brickmakers  with  the  bricklayers,  etc.,  which 
we  do  merely  to  simplify  the  diagram,  we  may  consider  three 
classes  of  men  to  whom  go  the  three  flows  d,  e,f.  These  three 
flows,  together  with  the  fourth  one,  c,  going  directly  to  society, 
are  equal  to  the  flow  b  to  the  landlord.  All  the  classes  of 
men  who  build  the  house  draw  their  sustenance  from  society, 
so  that  we  have  the  outflow  from  society  to  the  tenants  com- 
pensated by  four  inflows,  thus  completing  the  circuit. 

As  in  the  former  case,  we  might  have  subdivided  the  flow 
among  many  hundreds  or  thousands  of  different  classes,  includ- 
ing the  iron-founders,  owners  of  iron  ore,  managers  of  saw- 
mills, land-owners,  etc.  The  reader  can  do  this  to  any  extent 
he  desires,  when  he  finds  it  necessary  to  consider  the  effect  of 
the  operation  upon  any  particular  class  of  men.  But  this  fur- 
ther subdivision  does  not  change  the  total  amount  of  the  flow, 
but  only  splits  it  up  among  a  greater  number  of  classes. 

ILLUSTRATIONS  AND  EXERCISES. 

1.  Our  government  is  employing  a  portion  of  its  taxes  in  building  up  a 
navy,  principally  of  iron.    Draw  a  diagram  showing  the  principal  classes 
of  people  through  whom  the  money  thus  levied  goes  back  into  the  pockets 
of  the  taxpayers,  and  the  lines  of  flow. 

2.  Draw  a  diagram  showing  the  changes  in  the  flow  if,  in  lieu  of  build- 
ing the  navy,  our  government  expended  its  taxes  in  erecting  fortifications 
and  supplying  them  with  heavy  guns. 

8.  A  government  being  about  to  engage  in  war,  a  man  of  great  wealth 
employs  a  portion  of  his  income  from  houses  and  lands  in  equipping  a  regi- 
ment of  cavalry.  Draw  a  diagram  representing  the  flow  thus  arising. 

4.  Draw  a  diagram  showing  the  various  classes  of  people  among  whom 
the  money  paid  for  a  coat  may  be  considered  as  divided. 

5.  Do  the  same  thing  with  the  money  which  the  inhabitants  of  a  city 
pay  for  bread.     [In  the  last  three  questions  there  is  not  necessarily  any 
return  flow  to  be  drawn.] 


22 


338  THE  SOCIETAUY  CIRCULATION.  [IV.  14. 


CHAPTEK  III. 

VARIATIONS   IN   THE   EQUATION   OF   8OCIETARY  CIRCULATION. 

13.  IT  is  necessary  at  the  outset  that  we  have  clearly  in 
mind  the  results  reached  in  the  last  two  chapters.     They  may 
be  summed  up  as  follows  : 

I.  There  is  a  certain  definite  mass  of  money,  notes,  and  credit 
in  circulation,  the  amount  of  which,  in  dollars,  we  call  the  vol- 
ume of  currency,  and  represent  by  the  symbol  Y. 

II.  Each  dollar  of  this  mass  circulates  with  greater  or  less 
rapidity.     The  average  rapidity  we  represent  by  the  symbol  R. 
We  conceive  R  to  represent  the  average  number  of  times  which 
each  dollar  changes  hands  in  the  course  of  the  year. 

III.  It  is  necessary  to  the  well-being  of  a  community  that  a 
certain  sum  total  of  transfers  of  wealth  and  services  should  be 
made  between  its  members.    The  total  of  these  transfers  during 
the  unit  of  time,  measured  in  dollars  of  absolute  money, — that 
is,  on  the  unit  scale  of  prices, — is  represented  by  the  symbol  K. 

IY.  Representing  by  P  the  ratio  of  the  actual  scale  of 
prices  to  the  unit  scale,  the  value  of  the  absolute  dollar  meas- 
ured on  that  scale  will  be  equal  to  P.  The  amount  of  busi- 
ness expressed  in  the  current  scale  of  prices  will  then  be  K  X  P. 

Y.  This  being  the  case  so  long  as  all  the  processes  of  buying, 
selling,  incurring  debts  and  paying  them  go  on  at  a  regular 
and  uniform  rate,  we  have  the  equation 

Y  X  R  =  K  X  P. 

14.  All  four  of  the  quantities  Y,  R,  P,  and  K  are  subject  to 
change.     Let  us  first  consider  the  changes  to  which  Y,  or  the 
total  volume  of  the  currency,  is  subject.     Were  no  money  or 
credit  ever  introduced  into  or  withdrawn  from  the  circulation, 
no  change  could  occur  in  its  total  volume.     But  in  the  actual 


IV.  14.]    THE  EQUATION  OF  SOCIETARY  CIRCULATION.     339 

case  a  circulating  dollar  may  go  out  of  the  regular  course  of 
circulation  in  any  of  the  following  ways  : 

I.  If  it  is  a  coin  dollar,  it  may  be  withdrawn  through  being 
melted  into  bullion  or  exported  to  a  foreign  country.     Since  we 
are  considering  only  the  operations  within  a  certain  community, 
we  regard  money  as  outside  the  field  of  our  circulation  when  it 
passes  outside  the  community.     If,  as  we  might  well  do,  we 
suppose  our  community  to  include  the  whole  world,  then  there 
would  be  no  diminution  of  the  total  volume  of  the  currency  by 
the  export  of  coin*.     But  there  would  still  be  a  diminution  when- 
ever coin  was  melted  down. 

II.  Credit-money  is  withdrawn  by  the  payment  of  debts 
to  banks.     If  a  merchant  who  has  a  note  in  bank  pays  it 
in  coin,  that  coin  goes  into  the  vaults,  and  is  out  of  circulation 
until  it  is  loaned  to  somebody  else.     If  he  pays  it  in  bank-notes, 
the  same  thing  is  true.     If  he  pays  it  by  a  bank  cheque,  he 
transfers  to  the  bank  a  certain  credit  either  on  itself  or  on 
some  other  bank.     In  either  case  this  credit  is  cancelled  until 
a  new  loan  is  made,  and  thus  the  volume  of  credit-currency  is 
diminished  by  the  amount  of  the  payment. 

Of  course  the  volume  of  currency  is  increased  by  the  reverse 
operations.  Every  dollar  of  bullion  which  is  coined  adds  one 
dollar  to  the  money  in  circulation.  Whenever  a  loan  is  made 
at  a  bank,  the  amount  of  the  loan  is  added  to  the  circulation, 
as  already  shown  in  the  chapter  on  banks. 

It  may  be  remarked  that  neither  the  payment  of  ordinary 
commercial  debts  nor  the  deposit  of  money  in  a  bank  changes 
the  volume  of  the  currency.  In  the  first  case  we  have  only  a 
transfer  of  money,  which  the  receiver  takes  for  the  purpose  of 
transferring  it  again  as  soon  as  he  has  occasion.  The  transfer  is 
therefore  simply  an  ordinary  money  payment.  If  the  money 
is  deposited  in  a  bank,  it  is  true  that  that  particular  money 
does  for  the  time  being  pass  out  of  circulation.  But  an  addi- 
tion equal  to  the  deposit  is  made  to  the  credit-currency  by  the 
depositor  having  the  right  to  draw  cheques  on  the  bank,  so 
that  the  total  volume  is  the  same  as  before. 


340  TUB  SOCIETARY  CIRCULATION.  [IV.  15. 

Hence  when  the  banks  discount  new  notes  in  greater  quan- 
tity than  the  old  ones  are  being  paid  off,  they  increase  the  vol- 
ume of  the  currency.  The  banks  are  then  said  to  expand  the 
circulation.  When  they  demand  payment  of  maturing  notes 
to  a  greater  extent  than  they  discount  new  ones,  they  contract 
the  circulation. 

15.  Changes  in  Rapidity  of  Circulation.  Every  cause 
•which  leads  a  man  to  hesitate  before  spending  his  money  tends 
to  diminish  the  rapidity  of  circulation.  Every  cause  which 
tends  to  make  him  pass  it  off  quickly  tends  to  increase  it.  "We 
now  have  to  inquire  whether  there  are  any  causes  which  may 
be  from  time  to  time  operative  upon  a  whole  community,  so  as 
to  make  all  or  the  general  body  of  its  members  desirous  of  ex- 
changing their  money  more  or  less  rapidly  than  usual.  Busi- 
ness men  almost  universally  believe  in  such  changes.  "  Dis- 
turbance" and  "  stagnation"  of  business  imply  a  diminution  in 
R.  "  Briskness"  implies  that,  so  far  as  those  who  find  busi- 
ness to  be  brisk  are  concerned,  the  circulation  is  rapid.  Con- 
clusions drawn  from  the  experience  of  men  of  business  in  this 
particular  case  are,  however,  rather  unreliable,  and  we  must 
look  at  the  matter  more  closely. 

Money  circulates  with  a  normal  rapidity,  which  we  may  re- 
gard as  a  healthy  maximum,  when  every  man  who  earns  money 
can  immediately  pay  it  out  with  a  result  satisfactory  to  him- 
self. Every  cause  which  leads  him  to  doubt  what  is  the  most 
satisfactory  disposition  to  make  of  his  money  interferes  with 
his  expenditure,  and  leads  him  to  keep  his  money  longer  than 
he  otherwise  would.  The  general  rule  will  be  that  before  he 
receives  his  money  he  forms  more  or  less  definite  conclusions 
as  to  what  he  will  do  with  it.  If  anything  happens  to  disap- 
point the  expectations  on  which  those  conclusions  are  based, 
he  is  likely  to  keep  his  money  longer  than  he  otherwise  would. 
Let  us  see  what  examples  of  this  we  can  find. 

If  in  a  manufacturing  establishment  an  unexpected  dis- 
agreement occurs  between  the  employers  and  the  operatives, 


IV.  16.]  THE  EQUATION  OF  SOCIETART  CIRCULATION.     341 

the  money  which  the  former  received  in  the  course  of  business 
no  longer  goes  to  the  payment  of  the  latter,  ancl  remains  for  a 
longer  period  on  their  hands  than  it  would  otherwise  have  done. 
Thus  every  strike  on  the  part  of  laborers  tends  to  diminish  the 
rapidity  of  circulation.  If  prices  unexpectedly  rise  in  conse- 
quence of  the  strike,  purchasers  will  delay  buying,  and  a  still 
further  block  in  the  circulation  may  arise.  In  periods  of  un- 
certainty, investors  of  money,  that  is,  purchasers  of  capital,  be- 
come apprehensive,  and  their  money  lies  on  their  hands  longer 
than  it  would  otherwise  have  done. 

On  the  other  hand,  mere  "  hard  times"  does  not  necessarily 
imply  any  diminution  in  the  circulation,  though  they  may 
arise  from  that  cause.  When  business  of  some  one  kind  is 
very  dull  it  may  happen  that  the  people  who  ordinarily  spend 
their  money  in  that  particular  business  are  spending  it  in 
some  other  way.  It  is  therefore  impossible  to  conclude  with 
"entire  certainty  whether  the  circulation  is  more  or  less  rapid 
than  usual ;  but  we  may  suppose  it  true  that,  as  a  general 
rule,  when  business  is  dull  in  all  its  branches  the  circulation  is 
less  rapid  than  when  it  is  brisk. 

A  very  potent  cause  of  increase  in  the  rapidity  of  circulation 
is  the  issue  of  irredeemable  money.  Such  an  issue  leads,  as  will 
hereafter  be  shown,  to  a  rise  in  prices.  The  prospect  that 
prices  will  rise  makes  a  large  number  of  people  anxious  to 
purchase  as  soon  as  possible,  and  thus  to  obtain  all  the  money 
they  can  get.  It  therefore  causes  business  to  be  very  brisk  for 
the  time  being.  Conversely,  the  prospect  that  there  will  be  a 
fall  in  prices  leads  people  to  postpone  buying  as  long  as  possi- 
ble, and  thus  tends  to  diminish  the  rapidity  of  circulation. 

16.  Next  let  us  consider  the  changes  in  the  product 
K  X  P.  Remembering  that  this  product  signifies  the  entire 
exchange  transactions  of  the  community,  measured  in  current 
dollars,  we  perceive  that  it  may  change  from  two  causes  : 

I.  The  actual  increase  or  diminution  in  the  quantity  of  goods 
which  change  hands,  represented  by  K. 


342  TUE  SOCIETART  CIRCULATION.  [IV.  17. 

II.  A  change  in  the  general  scale  of  prices  at  which  the 
goods  are  sold.  This  scale  is  P. 

For  example,  if  exactly  the  same  transactions  should  take 
place  this  year  as  last,  but  at  double  the  price,  then,  although 
there  would  be  no  change  in  the  actual  transactions,  yet,  since 
every  sale  was  made  for  twice  as  many  dollars,  the  numerical 
measure  of  K  X  P  would  be  double  that  of  last  year.  We 
must  therefore  carefully  distinguish  between  these  two  causes 
as  affecting  the  measure  of  the  industrial  circulation.  As  a 
general  rule  the  actual  exchanges  will  not  vary  rapidly  so  long 
as  things  go  on  in  their  regular  way.  It  is  of  course  to  be  ex- 
pected that  in  a  growing  country  they  will  increase  from  year 
to  year  as  population  increases  and  production  improves.  As 
already  shown,  there  is  a  certain  amount  of  these  transactions 
which  is  most  advantageous,  and  in  which  everything  goes  on 
as  nearly  as  possible  to  every  one's  satisfaction.  So  long  as  this 
happens  it  makes  no  difference,  except  indirectly,  what  the' 
scale  of  prices  is.  All  our  current  wants  would  be  as  well  sat- 
isfied on  a  scale  of  half-dollars  as  on  one  of  two  dollars,  always 
provided  that  the  change  is  carried  through  so  as  to  include  all 
services  rendered.  Practically,  however,  it  is  impossible  to 
carry  such  a  change  uniformly  through,  and  therefore  it  is  to 
the  best  interest  of  society  to  have  as  little  change  as  possible 
from  month  to  month  and  from  year  to  year. 

17.  Effect  of  Changes  in  the  Volume  of  the  Currency. 
In  the  social  organism  demand  is  exercised  only  through  the 
instrumentality  of  the  currency.  "Whoever  purchases  anything 
in  market  must  have  the  money  to  pay  for  it,  either  in  hand 
or  in  prospect.  Since,  then,  his  power  of  demanding  is  limited 
by  his  power  of  commanding  money,  we  may  consider  money 
as  in  some  sort  the  instrument  of  demand.  We  have  now  to 
consider  the  effect  upon  demand,  price,  and  supply  produced 
by  changes  in  the  amount  of  money  in  circulation,  or  the  vol- 
ume of  the  currency. 

To  make  the  state  of  the  case  as  clear  and  simple  as  possible, 


IV.  17.]  THE  EQUATION  OF  SOCIETART  CIRCULATION.     343 

suppose  that  a  beneficent  government  or  any  other  power  should 
distribute  five  dollars  in  paper  money  or  coin  to  every  person 
within  its  sway:  what  would  be  the  consequence  ?  Firstly,  since 
a  very  great  majority  of  the  recipients  would  feel  the  want  of 
something  which  the  money  could  buy,  they  would  proceed  to 
purchase  the  necessaries  of  life  from  the  dealers.  The  latter 
would  therefore  find  their  stores  unusually  crowded,  and  would 
speedily  have  to  send  to  their  wholesale  dealers  for  an  increased 
stock.  The  latter,  again,  would  call  upon  the  producers  for  an 
additional  supply  of  goods.  The  result  of  this  increase  of  de- 
mand would,  as  shown  in  III.  17,  21,  be  a  rise  in  price. 

We  might  also  expect  an  increase  in  the  production,  and 
therefore  in  the  supply.  This  expectation,  however,  would 
probably  be  disappointed,  because,  by  hypothesis,  each  and 
every  producer  has  his  five  dollars  and,  for  the  time  being, 
would  be  more  anxious  to  buy  something  with  it  than  to  keep 
up  his  business.  So  long  as  everybody  crowded  to  the  stores  to 
buy,  everybody  would  have  to  leave  off  work,  for  a  while  at 
least ;  and  although  the  prospect  of  an  increased  price  would 
be  an  inducement  to  produce  more,  yet,  on  the  other  hand,  the 
feeling  of  increased  wealth  would  lessen  the  stimulus  to  hard 
work,  and  would  therefore  counteract  the  action  of  that  cause. 
We  should  therefore  have  two  effects  from  this  influx  of  money : 
firstly,  a  general  selling  off  of  the  store  of  products  through 
the  channels  of  business ;  secondly,  a  general  rise  of  prices. 

This  rise  of  prices  would  affect  different  classes  differently 
according  to  their  position.  The  man  who  promptly  spent  hie 
money  would  be  the  richer;  the  man  who  did  not  spend  it  until 
after  prices  had  risen  would  not  be  so  well  off.  Nearly  every 
one  engaged  in  trade  would  profit  by  the  increased  prices,  and 
be  encouraged  by  the  increase  of  his  business.  Workers  for 
wages  and  men  on  salaries  would  find  the  week  following  that, 
owing  to  the  rise  in  prices,  they  were  unable  to  purchase  as 
much  as  before.  Possibly  in  one  or  two  weeks  they  would 
find  their  whole  gift  absorbed  in  the  increased  prices  they  would 
have  to  pay,  so  that  they  would  be  worse  off  than  before.  They 


344  THE  SOCIETAR7  CIRCULATION.  [IV.  18. 

would  therefore  bo  compelled  to  demand  an  increase  of  wages 
which  they  might  ultimately  get  after  more  or  less  suffering. 
The  general  selling  off  of  goods  would  result  in  the  scarcity 
of  a  great  many  things  that  people  who  did  not  buy  them  at 
the  time  would  want,  and  this  would  have  to  be  made  up  by 
increased  work  in  some  directions. 

The  final  result  would  be  that  all  prices  and  all  current 
wages  would  rise  in  nearly  the  same  proportion.  Each  in- 
dividual would  therefore  be  able  to  command  no  more  of  the 
necessaries  and  comforts  of  life  than  before  he  had  received 
his  five  dollars.  So  far  as  current  operations  are  concerned, 
neither  harm  nor  good  would  on  the  whole  be  done.  Some 
would  gain  and  some  would  suffer. 

The  case  is  different  when  we  consider  future  debts  and 
payments.  Every  person  who  had  loaned  money  would,  when 
he  received  it,  find  that  he  could  purchase  less  of  the  neces- 
saries of  life  than  before.  He  would  therefore  be  a  positive 
loser ;  the  debtor  would  be  able  to  command  the  money  with 
less  labor,  and  would  therefore  be  a  gainer. 

The  reverse  effect  would  result  if  the  volume  of  the  cur- 
rency were  diminished  by  taking  money  from  the  community. 
There  would  be  a  falling  off  in  the  sales  of  all  dealers,  and 
hence  a  depression  in  trade  generally.  The  falling  off  in  de- 
mand would  lead  to  a  fall  of  prices,  and  wages  would  have  to 
be  lower  or  production  would  be  temporarily  stopped.  Debt- 
ors would  lose  by  having  to  work  more,  or  sell  more  goods  to 
command  the  money  which  they  had  agreed  to  pay;  and  cred- 
itors would  gain  by  being  able  to  purchase  more  with  the  pro- 
ceeds of  their  debt. 

18.  Effect  of  Varying  Indebtedness.  In  establishing  the 
equation  of  the  societary  circulation,  it  was  assumed  that  the 
payment  of  debts  throughout  the  organism  kept  pace  with 
their  incurrence,  so  that  the  two  balanced  each  other.  Now 
this  is  not  always  the  case.  The  history  of  commerce  shows 
periods  of  great  buoyancy  of  feeling  and  tendency  to  specula- 


IV.  18.]  THE  EQUATION  OF  SOCIETART  CIRCULATION.     345 

tion,  when  men  of  business  incur  debts  on  a  larger  scale  than 
nsual.  Since  every  debt  is  incurred  on  account  of  some  trans- 
fer of  goods  or  services,  for  which  no  money  payment  is  made 
at  the  time,  it  follows  that  the  whole  mass  of  indebtedness 
represents  that  portion  of  the  industrial  circulation  which  has 
not  yet  been  balanced  by  the  monetary  circulation.  At  the 
same  time,  as  already  remarked,  if  this  mass  of  indebtedness  is 
not  increasing,  the  two  circulations  must  still  balance  each 
other,  because  the  unbalanced  portion  of  the  industrial  circu- 
lation, for  which  indebtedness  is  being  incurred,  is  then  bal- 
anced by  the  equal  payment  of  former  debts. 

But  if  the  mass  of  indebtedness  is  increasing,  there  is  then  a 
portion  of  the  industrial  circulation  which  is  not  balanced  by 
the  monetary  flow  at  all,  and  thus  the  equation  is  disturbed. 
How  important  the  consequence  of  this  is  will  be  seen  by  re- 
flecting that  if  people  stopped  paying  off  their  old  debts,  and 
bought  everything  on  credit,  the  monetary  flow  would  for  the 
moment  entirely  cease.  This  is  of  course  an  extreme  case. 
But  let  us  suppose  as  a  possible  case  that  one  fourth  the  volume 
of  current  business  is  done  on  credit,  while  the  old  debts  are 
left  standing.  The  result  will  be  that  the  industrial  flow  will 

o 

be  to  the  monetary  flow  in  the  ratio  of  4  :  3.  If  before  this 
state  of  things  commenced  the  two  flows  balanced,  then  when 
the  speculation'  begins  there  will  be  an  apparent  redundancy  of 
the  monetary  flow,  because  the  volume  of  currency  suffices 
for  the  flow  4,  while  only  the  flow  3  is  required.  The  result 
will  be  the  same  as  in  the  case  of  an  increase  of  the  volume  of 
the  currency ;  that  is,  a  universal  demand  for  commodities  of 
all  kinds,  with  a  tendency  towards  a  rise  of  price. 

When  the  indebtedness  is  to  be  paid  off  the  reverse  effect 
occurs.  If  the  volume  4  of  regular  business  is  to  continue,  and 
a  volume  1  of  indebtedness  is  to  be  discharged,  there  will  be  a 
call  for  a  monetary  flow  represented  by  the  number  5.  But, 
on  the  scale  of  prices  established  by  the  speculation,  the  actual 
volume  of  currency  only  suffices  for  the  volume  3  of  exchanges. 
Thus  arises  a  state  of  things  to  be  subsequently  discussed. 


346  TUE  SOCIETARY  CIRCULATION.  [IV.  19. 

19.  Fundamental  Law  of  Value  of  the  Total  Volume  of 
Currency.  The  law  which  would  determine  the  amount  of  va- 
riation in  wages  and  prices  in  every  case,  after  things  had  been 
readjusted  on  the  new  basis,  can  be  got  at  by  considering  that 
in  the  industrial  circulation  nothing  would  really  be  changed 
except  the  scale  of  prices.  The  quantities  purchased  being 
the  same  as  before,  K  remains  unchanged.  In  the  equation 
K  X  P  =  V  X  R,  R  also  would  be  unchanged ;  whence  it 
follows  that  the  rise  in  the  price  P  would  be  proportional  to 
the  increase  in  the  total  volume  V  of  the  currency.  For 
example,  if  in  the  beginning  the  total  volume  of  the  currency 
had  averaged  $10  per  capita,  then  a  gift  of  $5  to  every  person 
would  add  50  per  cent  to  the  volume  of  currency.  To  re- 
store the  equilibrium,  the  scale  of  prices,  represented  by  P, 
would  have  to  be  increased  50  per  cent  also.  If,  instead  of 
adding  50  per  cent  to  the  currency,  it  had  been  doubled,  prices 
would  double.  After  the  equilibrium  was  restored  every  two 
dollars  would  do  the  same  work  which  one  dollar  had  done 
before.  Leaving  out  the  case  of  debtors  and  creditors,  and 
the  temporary  disturbance  before  equilibrium  was  restored, 
everything  would  be  readjusted  on  this  basis  of  double  prices. 

Since  the  volume  of  currency  and  the  prices  would  be  in- 
creased in  the  same  proportion,  it  follows  that  the  quantity  of 
goods  whose  value  would  equal  the  total  volume  of  the  cur- 
rency would  remain  unchanged.  "We  may  express  this  result 
in  the  following  form  : 

When  the  volume  of  the  currency  fluctuates,  other  condi- 
tions being  equal,  the  purchasing  power  of  each  unit  of 
money  varies  inversely  as  the  whole  number  of  units,  so  that 
the  total  absolute  value  of  the  whole  volume  of  currency  re- 
mains unaltered  by  cJianges  in  that  volume. 

The  question  now  arises,  What  fixes  this  absolute  value  of 
the  total  volume  of  currency  ?  To  answer  this  let  us  return  to 
the  equation  of  societary  circulation,  V  X  R  =  K  X  P.  Here 
R  represents  the  number  of  times  that  a  dollar  changes  hands 
in  a  year.  If  we  divide  the  year  by  R,  we  shall  have  the 


IV.  19.]  THE  EQUATION  OF  SOC1ETART  CIRCULATION.  347 
average  length  of  time  that  a  dollar  remains  in  one  man's 

o  o 

hands.  If  we  take  this  period  instead  of  one  year  as  our  unit 
of  time,  we  shall  have  R  =  1.  K  will  then  be  the  total  value 
of  the  exchanges  during  this  period,  measured  on  the  unit 
scale  for  which  P  =  1.  Thus  the  equation  will  become  V  =  K. 
We  conclude: 

The  absolute  value  of  the  total  volume  of  currency  circulat- 
ing in  a  social  organism  is  equal  to  that  of  -the  total  indus- 
trial circulation  of  the  organism  during  the  average  time  that 
apiece  of  money  remains  in  one  man's  hands. 

EXERCISES. 

1.  If  the  rapidity  of  circulation  should  be  doubled,  what  change  would  be 
made  in  the  volume  of  the  currency  in  order  that  the  same  business  should 
be  transacted  on  the  same  scale  of  prices  ?    (Deduce  the  result  from  the 
equation  of  societary  circulation.) 

2.  Show  how  the  answer  to  the  above  question  follows  from  the  second 
theorem  of  §  19. 

3.  "When  the  volume  of  the  currency  increases,  the  equation 

KXP=VXR    . 

can  be  kept  up  by  increasing  K  as  well  as  by  increasing  P;  that  is,  by  in- 
creasing the  volume  of  business  transacted  as  well  as  by  raising  the  price. 
Show  why  it  is  that  it  is  P  rather  than  K  which  responds  to  the  stimulus 
of  an  increase  of  V. 

4.  Do  3rou  interpret  the  first  theorem  of  §  19  as  meaning  that  the  absolute 
value  of  the  whole  volume  of  currency  remains  unaltered  even  when  popu- 
lation and  business  increase  ?    If  not,  how  will  this  absolute  value  change 
in  this  case?    Apply  your  answer  to  the  second  theorem. 

5.  If  a  continually  increasing  volume  of  business  has  to  be  transacted 
with  an  unvarying  volume  of  currency,  what  will  be  the  effect  on  prices? 

6.  If  producers,  laborers,  and  dealers  of  every  class  should  combine  to 
raise  prices  ten  per  cent,  and  refuse  business  on  any  other  terms,  what  effect 
would  this  action  have  on  the  amount  of  business  transacted? 

7.  If  everybody  believed  that  prices  were  going  to  fall,  what  effect  would 
this  belief  have  on  the  rapidity  of  circulation? 

8.  If  a  large  portion  of  the  material  currency  in  circulation  consisted  of 
interest  bearing  bank-notes,  what  would  be  tho  effect  on  R  and  P? 


THE  SOCIETART  CIRCULATION.  [IV.  20. 


CHAPTER  IY. 

THE   MEASUEE   OF   DEMAND   BY   ABSOLUTE   VALUE. 

2O.  MOST  of  the  economic  causes  which  we  have  heretofore 
considered  produce  their  effect  by  or  through  their  influence 
upon  demand.  Although  the  theory  of  this  influence  may  be 
regarded  as  entirely  contained  in  the  separate  results  of  the 
preceding  chapters,  yet,  in  order  to  give  entire  precision  to  our 
conclusions,  it  is  necessary  to  bring  our  separate  results  together, 
and  show  how  they  coalesce  into  a  single  theory  of  demand  as 
a  mathematical  quantity.  Let  us  begin  by  repeating  our  defi- 
nitions and  conclusions  respecting  demand  given  in  the  opening 
chapter  on  that  subject. 

The  demand  for  a  specific  commodity,  considered  as  a 
mathematical  quantity,  means  how  much  of  that  commodity 
can  be  sold — 

In  a  definite  market,  say  New  York,  Chicago,  or  the  entire 
country, 

During  a  fixed  period  of  time,  say  one  year, 

In  a  certain  condition  of  society  or  state  of  the  market, 

And  at  a  certain  price. 

Regarding  the  principal  places  or  combination  of  places 
which  we  take  as  our  market,  and  the  period  of  time,  as  fixed 
quantities  whose  changes  we  have  no  need  to  consider,  we  see 
that  the  amount  of  the  demand  will  depend  upon  and  vary 
with  the  third  and  fourth  conditions,  namely,  (1)  the  price 
charged,  and  (2)  the  condition  or  wants  of  the  public  in  rela- 
tion to  that  commodity.  These  innumerable  varying  conditions 
may  be  summarized  under  the  single  comprehensive  and  there- 
fore somewhat  ill-defined  term  state  of  the  market. 

"With  regard  to  the  first  cause  we  have  found  the  law  to  be 
a  very  simple  one,  namely,  the  higher  the  price  the  less  the 


IV.  20.]  MEASURE  OF  DEMAND  BY  ABSOLUTE  VALUE.     349 

quantity  demanded.  We  may  assume  the  action  of  this  cause 
to  be  thoroughly  understood,  and  to  need  no  further  elucida- 
tion. It  is  the  second  group  of  causes,  comprehended  in  the 
term  "  state  of  the  market,"  with  which  we  are  concerned.  In 
accordance  with  a  general  principle  of  scientific  inquiry,  we 
have  to  investigate  the  action  of  this  cause  on  the  supposition 
that  all  other  conditions  are  equal.  We  must  therefore  sup- 
pose that  in  our  market,  and  during  the  period  which  we  con- 
sider, a  fixed  and  invariable  price  is  put  upon  the  commodity. 
The  quantity  sold  will  then  vary  only  with  the  state  of  the 
market.  If  more  people  are  buying  flour  at  five  dollars  per 
barrel  this  month  than  last  month,  it  will  show  that  there  has 
been  some  change :  perhaps  a  foreign  demand ;  perhaps  some 
new  use  for  flour ;  perhaps  greater  ability  on  the  part  of  the 
public  to  buy  ;  perhaps  any  other  of  an  innumerable  series  of 
causes.  We  thus  get  an  idea  of  a  demand  which  does  not  mean 
quantity  really  sold,  but  the  quantity  which  would  be  sold 
supposing  the  price  to  be  fixed  and  invariable.  This  is  the  or- 
dinary mercantile  meaning  of  demand  as  a  quantity,  and  must 
not  be  confounded  with  the  definition  formerly  given.  An 
example  will  make  the  distinction  clear. 

The  producers  of  nickel  may  be  able  and  willing  to  turn  out 
the  same  number  of  pounds  of  that  commodity  annually,  year 
after  year.  Then  if,  from  any  cause  whatever,  the  state  of  the 
market  so  changes  that  there  is  an  increased  demand,  the  pro- 
ducers will  raise  the  price  until  the  demand  is  brought  down, 
as  before,  to  the  supply,  which  we  suppose  to  remain  invaria- 
ble. We  should  then  have  the  demand  and  price  rising  and 
falling  together,  in  accordance  with  the  second  law  as  laid  down 
in  III.  16.  The  difference  between  the  two  definitions  of  de- 
mand will  then  be  seen  in  this  form  :  Since,  by  our  hypothesis, 
the  quantity  really  sold  is  the  same  in  the  two  cases,  the  actual 
demand,  as  above  defined,  has  remained  the  same.  But,  in  mer- 
cantile language,  there  has  been  a  change  in  the  state  of  the 
market,  such  that  more  nickel  would  have  been  demanded  at 
a  fixed  price  than  before,  and  thus,  by  the  second  method  of 


350  TUB  SOCIETART  CIRCULATION.  [IV.  21. 

measurement,  demand  has  increased.  We  see,  then,  that  there 
are  two  distinct  ways  of  measuring  demand  between  which  we 
must  carefully  distinguish.  Both  are  perfectly  legitimate,  and 
may  be  useful  if  wo  do  not  confound  them.  A  clear  concep- 
tion of  each  is  all  that  is  necessary  to  avoid  confusion.  These 
conceptions  may  be  assisted  by  calling  the  one  the  actual  de- 
mand, or  the  quantity  sold,  and  the  other  the  market  de 
mand,  which  expresses  the  wants  of  the  public.  The  market 
demand  will  then  be  a  hypothetical  quantity,  expressing  the 
apparent  want  of  the  public  for  a  commodity,  and  the  actual 
demand  will  be  the  quantity  really  sold. 

21.  The  relation  of  these  two  measures  of  demand  can  be 
made  quite  clear  by  the  use  of  algebraic  symbols.  It  has  been 
pointed  out  (III.  15)  that  the  general  average  relation  between 
demand  and  price  may  be  approximately  expressed  by  saying 
that  demand  varies  inversely  as  price.  The  fact  that  two  quan- 
tities vary  inversely  is  expressed  algebraically  by  saying  that 
one  is  equal  to  some  constant  quantity  divided  by  the  other 
(III.  7).  Hence  if  we  put 

P,  the  price  at  which  a  commodity  is  offered, 
D,  the  quantity  which  will  be  bought  at  that  price, 
then  the  relation  between  D  and  P  will  be  expressed  by  such 
an  equation  as 

D=T*      .;-.  (D 

where  we  put  M  for  some  constant  quantity.  So  long  as  M 
remains  unchanged,  D  will  increase  as  P  diminishes,  and  di- 
minish when  P  increases. 

In  order  to  learn  how  much  of  the  commodity  can  be  sold  at 
a  given  price,  say  $3  per  pound,  we  must  know  M  as  well  as  P. 
Our  equation  will  be,  in  this  case, 

»-•¥• 

The  quantity  M  is  what  we  have  called  the  market  demand, 
or  the  public  want  for  the  commodity.  If  we  suppose  P  to 


IV.  22.]  MEASURE  OF  DEMAND  BY  ABSOLUTE  VALUE.     351 

stand  fixed  at  $3,  then  D  will  increase  when  M  increases,  and 
vice  versa.  The  greater  the  number  of  people,  the  more  they 
want  the  commodity,  and  the  better  able  they  are  to  buy,  the 
larger  M  will  be.  It  therefore  depends  on  all  the  circumstances 
which  induce  people  to  buy,  except  the  price  charged  for  the 
commodity. 

22.  We  have  already  seen  that  in  the  long-run,  and  omit- 
ting certain  exceptional  cases,  the  quantity  of  each  commodity 
sold  is  necessarily  equal  to  the  quantity  produced.  Hence  when 
we  speak  of  the  actual  demand  we  cannot  correctly  talk  about 
variations  in  that  demand  without  corresponding  variations  in 
the  supply,  because  that  demand  is  equal  to  the  supply.  We 
cannot  correctly  say  that  any  cause  will  increase  the  demand 
unless  it  increases  the  quantity  of  a  commodity  brought  to 
market  and  sold.  Since,  in  the  discussion  alluded  to  in  the  be- 
ginning of  this  chapter,  what  is  called  demand  is  the  desire  of 
the  public  for  certain  services  or  commodities  which  are  sup- 
posed not  to  depend  upon  the  quantity  of  those  commodities 
produced,  but  upon  the  state  of  the  market,  it  follows  that  it 
is  the  market  demand  which  is  there  considered.  We  shall  there- 
fore in  the  present  chapter  use  the  term  demand  to  signify  the 
market  demand,  and  so  shall  suppose  it  to  express  a  certain  con- 
dition of  the  market,  having  no  reference  to  the  real  market 
price,  but  expressing  how  much  of  the  commodity  can  be  sold 
in  a  fixed  period  of  time  at  a  fixed  price. 

Accepting  this  definition,  we  have  pointed  out  a  cause  which 
immediately  affects  demand.  With  every  addition  to  the  flow 
of  the  currency  there  is  an  increased  demand  for  all  commodi- 
ties, no  matter  whether  the  augmentation  of  the  flow  arises 
from  an  increase  in  Y  or  in  R.  Hence  we  may  say  the  market 
demand  for  things  in  general  is  proportional  to  the  flow  of  the 
currency,  as  already  defined. 

We  have  called  the  market  demand  hypothetical.  The  rea- 
son is  clear.  The  quantity  actually  sold  cannot  exceed  the  sup- 
ply. Therefore  if  we  suppose  a  constant  and  rapid  increase  of 


362  TUK  SOCIETARY  CIRCULATION.  [IV.  22. 

the  currency  constantly  going  on,  without  any  increase  of  sup- 
ply, while  the  price  is  fixed,  the  whole  supply  of  goods  on  hand 
might  be  speedily  sold  out  and  the  operation  of  buying  would 
have  to  stop.  In  actual  trade  the  price  always  rises  under  such 
circumstances.  Hence  the  case  of  a  fixed  price  is  necessarily 
hypothetical.  But  though  hypothetical,  it  affords  us  a  method 
of  measuring  a  certain  quantity,  namely,  the  ability  and  willing- 
ness of  the  public  to  buy,  which  is  measured  by  the  quantity  they 
would  buy  at  a  fixed  price. 

The  question  now  arises,  Is  this  measure  of  ability  and  will 
a  true  one?  are  the  public  really  any  more  able  and  willing 
to  buy  when  the  flow  of  the  currency  is  increased  than  they 
were  before  ?  The  answer  is  that  this  depends  on  how  we  are 
to  measure  this  ability  and  willingness.  In  a  certain  sense  they 
are  more  so ;  and  in  another,  and  perhaps  more  exact  sense,  they 
are  not  more  so.  We  have  here  our  former  case  of  measures 
by  a  varying  foot-rule.  If  we  agree  to  measure  by  a  foot-rule 
which  increases  and  diminishes  in  length  from  day  to  day  in 
spite  of  all  we  can  do,  it  is  certain  that  any  object  that  we 
measure  will  contain  more  feet  one  day  than  another.  But  if 
we  consider  length  measured  by  an  absolute  standard,  we  may 
regard  objects  in  general  as  being  invariable  in  length.  It  may 
then  be  perfectly  true  that  a  piece  of  timber  would  measure 
more  feet  one  day  than  another,  although  its  real  length  should 
remain  unchanged. 

So  in  the  present  case.  If  we  measure  the  ability  of  the 
public  to  buy  by  the  quantity  of  a  commodity  which  they  will 
purchase  in  a  year  at  a  price  fixed  in  dollars,  then  the  measure 
of  that  ability  will  undoubtedly  increase  with  the  flow  of  the 
currency.  With  every  increase  in  the  flow  they  will  be  able 
to  buy  more,  because  they  have  more  dollars  to  buy  with  ;  with 
every  diminution  in  the  flow  they  will  be  able  to  buy  less; 
just  as  when  we  measure  a  piece  of  timber,  the  shorter  the  foot 
the  greater  the  measure. 

But  if  we  adopt  an  absolute  standard,  if  we  consider  the 
quantity  which  can  be  bought,  not  at  a  price  fixed  in  dollars, 


IV.  23.]  MEASURE  OF  DEMAND  BY  ABSOLUTE  VALUE.     353 

but  at  a  price  fixed  by  a  tabular  standard  of  value,  as  described 
in  Chapter  II.,  then  there  can  be  no  change  in  the  general  ability 
of  the  public  to  buy  produced  by  changes  in  the  flow  of  the 
currency,  because  the  money  price  will  then  keep  pace  with 
the  flow. 

These  same  statements  apply  to  our  measures  of  market  de- 
mand. Let  us  recall  the  definition  of  this  term.  When  the 
quantity  of  goods  which  can  be  sold  at  a  fixed  price  increases, 
we  say  that  the  market  demand  increases ;  when  this  quantity 
diminishes,  we  say  that  the  market  demand  diminishes.  Now 
if  by  the  words  "fixed  price"  we  mean  a  fixed  number  of  dol. 
lars,  without  reference  to  the  absolute  value  of  those  dollars, 
then  evidently  our  measure  of  the  market  demand  becomes  de. 
ceptive.  Suppose,  for  example,  that  the  volume  of  the  currency 
is  doubled,  and  that  in  consequence  all  measures  of  value  in 
currency  have  doubled.  Then  every  seller  would  meet  a  great 
rush  of  people  to  buy  his  goods.  He  might  therefore  say,  "  The 
market  demand  for  my  goods  has  doubled."  But  in  reality  he 
would  be  offering  his  goods  at  half  the  old  price,  and  he  could 
at  any  time  cause  the  same  rush  of  buyers  by  reducing  his  prices 
to  one  half.  Hence  in  order  to  compare  two  states  of  the  mar- 
ket at  different  times  with  respect  to  any  commodity  we  must 
reduce  the  two  prices  of  the  commodity  to  the  same  tabular 
standard  of  value.  When  we  find  that  a  certain  cause  stimu- 
lates demand  we  must  ascertain  whether  it  does  this  merely  by 
increasing  the  flow  of  the  currency  or  by  bringing  other  causes 
yito  play. 

23.  We  now  recognize  two  measures  of  market  demand : 
the  current  measure,  expressed  by  money,  and  varying  with 
everything  that  affects  either  the  volume  or  rapidity  of  circu- 
lation ;  and  the  absolute  measure,  which  is  expressed,  not  in 
money,  but  by  the  general  average  prices  of  commodities  and 
services.  It  is  necessary  to  have  this  distinction  clearly  in  mind 
in  all  our  discussions  of  the  effect  of  economic  causes  upon  de- 
mand. Causes  which  act  through  the  general  circulation  by 
23 


;tf  4  TI1E  SOCIETAR7  CIRCULATION.  [IV.  23. 

adding  to  its  volume  or  stimulating  its  rapidity  affect  the  cur- 
rent demand,  but  not  the  absolute  demand.  Causes  which  act 
through  supply,  or  by  changing  the  wants  of  the  community, 
by  opening  up  new  markets  or  by  finding  new  uses  for  tiring*, 
change  the  absolute  demand. 

This  distinction  may  be  made  clear  by  returning  to  the  alge- 
braic equation  and  again  considering  the  market  demand  M. 
The  fact  that  this  quantity  varies  directly  as  the  flow  of  the 
currency  is  expressed  by  saying  that  it  is  equal  to  some  constant 
quantity  multiplied  by  that  flow  (II.  6).  If  we  put 

N,  this  constant  quantity, 

F,  the  flow  of  the  currency, 
•we  shall  therefore  have,  in  equation  (1), 

M  =  N  X  F  (a) 

and 

N  v  F  F 

D=^X-i  =  NXp.  @) 

p 

Thus  if  we  call  F'  the  quotient  -,  we  shall  have 

£ 

D  =  pr  <«> 

Now  let  us  notice  the  relation  of  these  quantities.  Equation 
(a)  expresses  the  fact  that  if  the  flow  F  of  currency  increases, 
the  market  demand  M  will  also  increase.  But  this  presupposes 
that  we  measure  this  market  demand  by  the  amount  we  can  sell 
at  a  fixed  price  in  current  dollars.  "When  the  flow  of  the  currency 

increases,  these  dollars  become  less  valuable ;  so  that  the  price 

p 
in  absolute  measure  is  — ,  or  P'.     Hence  the  equation  (<?)  ex- 

r 

presses  the  actual  demand  when  the  price  is  reduced  to  absolute 
measure  by  allowing  for  changes  in  the  absolute  value  of  the 
dollar,  and  this  demand  is  independent  of  the  flow  of  the  cur- 
rency. 

The  conceptions  of  the  three  measures  of  demand  just  de- 
scribed are  of  such  fundamental  significance  that  we  shall  re- 
capitulate and  condense  them. 


IV.  24.]  MEASURE  OF  DEMAND  BY  ABSOLUTE  VALUE.     355 

The  current  market  demand  for  a  commodity  is  the  quantity 
of  that  commodity  which  a  community  would  purchase  in  a 
year  at  a  price  fixed  in  dollars. 

The  absolute  market  demand  is  the  quantity  the  community 
would  purchase  at  a  price  varying  to  keep  pace  with  the  abso- 
lute value  of  the  dollar. 

The  actual  demand  is  the  quantity  which,  as  a  matter  of 
history,  the  community  really  does  purchase. 

24.  The  great  importance  of  the  above  principles  arises  from 
the  fact  that  the  public  look  upon  increased  demand  as  an  eco- 
nomic good,  and  upon  diminished  demand  as  an  economic  evil, 
and  are  thus  prone  to  consider  demand  as  a  measure  of  prosper- 
ity. "When  the  merchant  finds  more  people  coming  to  his  store 
for  his  goods,  and  the  laborer  finds  more  people  to  pay  him  what 
he  considers  fair  wages,  there  is  a  feeling  on  the  part  of  both 
that  they  are  benefited.  Of  course  there  is  no  corresponding 
feeling  on  the  part  of  the  buyers  and  the  employers  that  they 
are  injured,  because  if  they  had  such  a  feeling  they  would  not 
come  forward  with  their  demands.  The  fact  that  they  do  come 
forward  demanding  goods  or  labor  shows  that  they  expect  to 
reap  an  advantage  thereby. 

The  reverse  is  true  when  the  employer  ceases  to  come  for- 
ward, and  the  customer,  having  spent  his  money,  stays  away 
from  the  store.  The  merchant  and  laborer  then  feel  that  their 
prosperity  is  diminishing. 

Thus  arises  a  feeling  on  the  part  of  the  community  at  large 
that  those  economic  causes  which  stimulate  demand  should  in 
some  way  be  promoted,  as  being  beneficial,  and  that  those  which 
diminish  it  should  be  avoided,  as  productive  of  evil.  Since,  then, 
with  every  'increase  in  the  volume  6r  rapidity  of  the  currency 
there  is  an  increased  market  demand  when  measured  in  the 
usual  way,  and  in  fact  in  the  only  way  in  which  we  can  practi- 
cally measure  it  for  the  time  being,  it  follows  that,  by  a  nat- 
ural process,  there  is  in  society  a  certain  tendency  to  favor  every 
measure  which  will  increase  the  volume  or  rapidity  of  the  cir- 
culation. 


356  THE  SOCIETART  CIRCULATION.  [IV.  35. 

Both  of  these  cases  indicate  changes  in  the  current  market 
demand,  but  we  cannot  tell  whether  they  indicate  changes 
in  the  absolute  market  demand  until  we  know  the  causes  at 

play. 

We  have  just  spoken  of  measuring  demand  in  currency  as 
the  only  practical  way  of  doing  it  for  the  time  being.  This  is 
necessarily  the  case.  We  have  no  way  of  measuring  demand 
at  the  moment  in  absolute  measure,  because  it  requires  an  elab- 
orate statistical  investigation  of  the  prices  of  commodities, 
which  there  is  no  authority  to  undertake.  We  are  in  the  po- 
sition of  a  community  which  has  no  other  than  the  varying 
foot-rule  with  which  to  measure  its  piece  of  timber,  and  which 
is  therefore  obliged  to  accept  those  measures  for  the  time 
being,  and  to  conclude  upon  absolute  lengths,  not  directly  from 
the  measures,  but  from  long-continued  observation  of  their  va- 
riations. So  in  economics,  although  we  are  obliged  to  measure 
the  current  intensity  of  demand  in  terms  of  the  circulation, 
yet  we  know  that  we  are  thus  liable  to  be  deceived,  and  that  we 
must  refer  it  to  absolute  measure  whenever  we  are  to  get  cor- 
rect results. 

25.  We  have  now  to  show  that  changes  in  demand  arising 
from  changes  in  the  flow  of  the  currency  neither  lessen  any 
avoidable  evils  nor  lead  to  any  attainable  benefits.  We  say 
"  avoidable  evils  "  and  "  attainable  benefits,"  because  with  these 
alone  are  we  concerned  in  economics.  If  we  look  closely,  we 
shall  see  that  the  current  aspirations  on  the  subject  are  directed 
towards  a  Utopia.  People  have  in  mind  a  certain  ideal  state 
of  things,  in  which  every  laborer  is  constantly  employed,  every 
merchant  has  as  many  customers  as  he  can  wait  upon,  and 
every  railway  as  much  freight  as  it  can  carry.  I  say  this  idea  is 
purely  Utopian,  for  changes  in  the  demand  and  supply  of  various 
commodities  are  absolutely  unavoidable.  The  people  want 
more  of  one  thing  to-day  and  more  of  another  thing  to-morrow ; 
next  year  they  will  leave  off  wearing  something  that  they  wore 
this  year  and  take  to  something  new.  One  month  they  will  lay  in 


IV.  25.]  MEASURE  OF  DEMAND  BY  ABSOLUTE  VALUE.     357 

a  three  months'  supply  of  goods,  and  perhaps  save  their  money 
for  the  two  months  following.  Thus,  as  already  shown,  the 
processes  of  production  do  not  go  on  in  a  continuous  stream, 
but  by  a  series  of  waves.  Necessarily  the  employment  of  la- 
borers who  are  carrying  on  the  processes  vary  in  the  same  way. 
Now  this  class  finds  itself  with  nothing  to  do,  and  now  that 
class.  There  is  therefore  but  one  possible  way  of  insuring  that 
every  laborer  shall  be  constantly  employed.  It  is  to  require 
that  he  shall  work  every  day  for  any  wages  that  he  can  get, 
whether  it  is  ten  cents  or  ten  dollars,  and  shall  be  put  at  work 
by  the  authorities  if  he  is  any  morning  found  idle  after  the 
hour  for  commencing  work.  Thus  the  idea  of  remedying  this 
evil  is  purely  Utopian.  No  practical  benefit  can  arise  from  dis- 
cussing any  measures  looking  to  finding  employment  for  every- 
body all  the  time. 

What  we  are  to  remember  in  this  connection  is  that  the  dif- 
ference between  the  two  measures  of  demand  for  labor  corre- 
sponds to  a  difference  in  the  measure  of  the  wages  of  labor. 
That  is,  we  may  measure  the  wages  of  the  laborer  either  by 

The  amount  of  money  which  he  can  receive  for  a  week's 
work,  or 

The  quantity  of  commodities  which  he  can  buy  with  a  week's 
wages. 

The  first  is  the  popular  method  of  measuring.  When  we 
say  that  wages  are  higher  in  America  than  in  England,  we 
mean  that  the  laborer  can  get  more  money  for  a  week's  work 
in  America  than  in  England.  But  it  needs  no  argument  to 
show  that  this  is  not  the  true  measure  of  his  prosperity,  and 
that  the  real  question  is,  How  much  sustenance  can  he  com- 
mand in  the  respective  countries  ?  It  is  also  evident  that 
any  cause  which  enables  him  to  command  more  money  for  a 
day's  work,  but  which  at  the  same  time  increases  the  amount 
which  he  must  pay  for  his  week's  food  and  clothing,  does  not 
really  do  him  any  good.  He  may  indeed,  through  his  igno- 
rance of  economics,  be  deceived  into  thinking  that  he  is  bene- 
fited by  the  higher  wages ;  but  this  is  a  kind  of  deception 


TUB  SOCIETAltY  CIRCULATION.  [IV.  25. 

which  he  will  not  long  submit  to.  Now  a  very  little  exami- 
nation will  show  us  that  an  increase  of  the  flow  of  the  cur- 
rency can  at  best  only  raise  the  laborer's  wages  in  money,  and 
cannot  increase  the  amount  of  subsistence  which  he  is  able  to 
command  with  his  day's  work.  That  this  must  be  so  will  be 
seen  by  looking  at  the  subject  from  the  communistic  point  of 
view  (II.  54).  The  community  at  large,  of  which  laborers  of 
some  kind  form  the  largest  portion,  can  be  fed  only  with  the 
food  actually  raised,  and  clothed  only  with  the  cloth  actually 
made.  But  these  actual  quantities  are  dependent  upon  and 
limited  by  physical  circumstances  and  cannot  be  altered  by 
changes  in  the  currency. 

To  show  how  the  same  result  follows  from  the  point  of  view 
we  have  been  taking  in  the  present  chapter,  suppose  an  increase 
in  the  flow  of  the  currency  to  take  place  just  as  an  unemployed 
laborer  has  made  up  his  mind  how  many  dollars  he  considers 
an  equivalent  for  his  week's  work.  If  he  gets  employment 
under  the  stimulus  of  the  increase  and  goes  to  work,  then,  be- 
fore he  can  spend  his  week's  wages  prices  have  risen  a  little. 
They  rise  still  more  before  he  can  spend  his  second  week's 
wages,  and  thus  he  continuously  finds  himself  able  to  buy  less 
and  less.  He  is  therefore  no  better  off  than  if  he  had  gone  to 
work  in  the  beginning  on  unsatisfactory  terms,  and  is  obliged 
to  demand  an  increase  of  wages,  and  probably  be  thrown  out 
of  employment,  just  as  he  was  before  in  his  efforts  to  get  the 
present  rate.  He  is  therefore  in  no  manner  benefited  by  the 
increase  of  wages. 

So  also  with  the  general  prosperity.  An  increase  in  the 
flow  of  the  currency  will  cause  a  temporary  wave  in  the 
flow  of  goods  from  the  manufactories  to  the  consumers.  But 
this  wave  will  inevitably  be  followed  by  a  depression,  and 
is  therefore  solely  temporary  in  its  effects.  The  only  causes 
which  permanently  advance  national  prosperity  are  the  slightly 
increasing  improvements  in  production,  new  railways,  new 
farms,  new  warehouses,  improved  machinery,  improved  orga- 
nization of  labor. 


IV.  27.]  OF  INDIVIDUAL  INCOME  AND  EXPENDITURE.     359 


CHAPTER  V. 

OF   INDIVIDUAL   INCOME   AND   EXPENDITURE. 

26.  BY  the  annual  income  of  a  person  is  meant  the  net 
sum  of  his  wages,  gains  and  profits  during  a  year,  whether 
derived  from  his  own  labor,  his  business  management,  or  the 
interest  upon  his  capital.     To  find  its  amount  we  must  sub- 
tract from  the  sum  total  of  moneys  received  by  him  in  pay- 
ment the  amount  which  he  has  had  to  expend  in  order  to 
transact  his  business  and  keep  up  his  capital.     It  is  therefore 
the  sum  total  of  the  monetary  flow  to  him,  diminished  by  the 
flow  from  him  for  the  purposes  last  mentioned.     The  amount 
to  be  subtracted  on  account  of  business  expenses  and  capital 
from  the  individual  monetary  flow  is  very  different  among  differ- 
ent classes  of  persons.     One  whose  sole  occupation  is  to  work 
for  wages  or  a  salary  has  no  payment  to  subtract.     His  income 
is  the  same  as  the  monetary  flow  to  him.     The  other  extreme  is 
found  in  the  case  of  men  who  transact  business  on  a  very  large 
scale.     They  are  continually  buying  and  selling,  and  their 
income  may  be  only  a  very  small  fraction  of  their  transactions — 
BO  small  a  fraction,  in  fact,  that  it  may  be  completely  swallowed 
up  by  an  unexpected  rise  or  fall  of  prices. 

27.  The  question  what  payments  are  to  be  considered  as 
necessary  to  the  continued  transaction  of  business  and  the  pres- 
ervation of  capital  may  be  a  difficult  one  in  special  cases ;  but 
the  guiding  principles  may  be  made  quite  clear.     In  estimating 
net  income  it  might  be  claimed  that  we  should  subtract  from 
the  total  receipts  of  the  individual  the  amount  necessary  for  his 
own  sustenance.     But  this  would  be  wrong  in  principle,  because 
the  very  object  of  determining  income  is  to  learn  how  much 
the  person  can  afford  to  expend  on  his  own  sustenance  without 


;?i;o  THE  SOCIETART  CIRCULATION.  [IV.  27. 

encroaching  upon  his  reserve  of  capital  or  diminishing  his 
power  to  carry  on  business.  Hence  we  must  leave  unsubtracted 
all  that  he  expends  in  improving  his  capital  or  increasing  his 
business. 

As  one  example  let  us  take  the  case  of  a  merchant.  At  the 
end  of  a  year  he  finds  that  he  has  sold  goods  to  a  certain 
amount.  The  principal  items  which  he  has  to  subtract  from 
this  amount  in  order  to  obtain  his  income  are  these : 

T.  The  prime  cost  of  the  goods  he  has  sold. 

II.  Kent  of  storehouse,  insurance,  and  other  expenses  at- 
tendant upon  the  simple  preservation  of  his  stock  in  proper 
condition  for  sale. 

III.  "Wages  to  clerks  and  others  engaged  in  selling  goods  or 
transacting  his  business. 

IV.  Stationery,  postage,  losses  from  bad  debts,  and  other 
miscellaneous  items  incident  to  the  transaction  of  business. 

After  subtracting  these  and  any  other  items  necessary  to  the 
conduct  of  his  business  from  the  sum  total  of  his  sales,  the 
remainder  will  represent  his  net  income. 

In  the  case  of  a  manufacturer  the  same  items  will  occur  with 
some  modifications  and  additions.  Instead  of  the  item  "  prime 
cost  of  goods  sold  "  he  will  have  the  prime  cost  of  all  the  raw 
material  manufactured  and  sold.  He  will  also  have  the  very 
important  item  "  wear  and  tear  of  machinery  and  other  forms 
of  fixed  capital."  This  item  is  necessarily  somewhat  indefinite. 
If  his  machinery  has  been  going  during  the  whole  year  with- 
out any  repairs,  it  must  have  deteriorated,  and  the  amount  of 
deterioration  must  be  estimated  as  best  he  can.  If  he  has 
made  large  improvements  in  his  factory,  and  paid  for  them  out 
of  his  profits,  such  payment  should  not  be  subtracted,  but 
should  be  considered  as  an  investment  of  his  surplus  income. 

In  the  case  of  great  changes  in  price  the  question  will  some- 
times arise,  What  is  to  be  considered  as  the  measure  of  the  capi- 
tal kept  up?  Suppose  a  merchant  to  find  at  the  end  of  the 
year  that  although  the  actual  stock  of  goods  on  hand  is  nearly 
the  same  as  at  the  beginning,  yet  their  prime  cost  is  greater, 


IV.  27.]  OF  INDIVIDUAL  INCOME  AND  EXPENDITURE.     361 

and  their  cost  if  purchased  now  would  be  double.  Is  he  to 
consider  this  increase  of  value  as  a  profit  earned  and  applied 
so  as  to  double  his  capital?  We  reply,  Not  if  the  rise  in 
prices  is  the  result  of  a  general  increase  in  the  scale  of  prices 
arising  from  a  diminution  in  the  absolute  value  of  the  dollar. 
In  this  case  there  would  be  no  increase  of  his  actual  capital, 
but  only  an  apparent  increase  arising  from  his  measuring  his 
capital  by  a  depreciated  standard.  If,  however,  the  rise  of 
prices  is  confined  to  the  particular  stock  of  goods  he  deals  in, 
and  grows  out  of  some  scarcity  in  the  supply,  the  greater  value 
would  represent  an  actual  increase  of  his  capital,  and  might  be 
counted  as  a  profit,  and  therefore  as  an  addition  to  his  income. 

In  other  cases  we  have  to  consider  whether  an  expenditure 
was  incident  to  the  transaction  of  business,  or  was  applied 
to  the  sustenance  of  the  person  or  his  family.  For  example,  if 
a  physician  who  receives  annually  $3000  in  fees  has  to  pay  out 
$500  of  this  amount  on  account  of  a  horse  and  buggy  in  which 
to  visit  his  patients,  his  net  income  is  only  $2500.  But  if  he 
should  visit  his  patients  on  foot  and  employ  the  horse  and 
buggy  to  give  his  wife  and  family  a  daily  airing,  we  should  re- 
gard that  expenditure  as  coming  out  of  his  income,  and  say  that 
his  net  income  was  $3000.  The  difference  in  the  two  cases  is 
that  in  the  one  the  horse  and  buggy  are  supposed  to  be  used  for 
business  purposes  and  not  for  enjoyment,  whereas  in  the  other 
they  are  used  for  enjoyment. 

Corporate  Income.  Another  difficult  case  arises  when  we 
consider  the  income  of  companies.  The  preceding  rules 
apply  to  any  legal  person.  A  railway  or  manufacturing  com- 
pany may  have  its  own  independent  income.  Such  income, 
in  the  regular  course  of  business,  is  supposed  to  be  divided  at 
stated  times  among  the  shareholders  as  dividends,  and  thus  to 
become  a  part  of  their  regular  incomes.  But  very  often  the 
profits  gained  by  the  company,  instead  of  being  so  divided,  are 
employed  in  increasing  the  capital  or  enlarging  the  business  of 
the  company.  In  such  a  case  are  the  stockholders  to  be  regard- 
ed as  in  receipt  of  an  income  from  their  shares  ?  If  so,  how  is 


362  THE  SOCIETART  CIRCULATION.  [IV.  28. 

the  amount  to  be  determined  ?  Since  they  get  nothing  at  all 
from  the  company,  it  might  seem  that  the  profits  of  the  latter 
should  not  be  reckoned  as  income  to  them.  On  the  other  hand, 
if  they  have  a  right  to  their  prospective  share  of  these  profits, 
and  this  prospective  right  has  a  market  value,  they  should  be 
considered  as  in  receipt  of  an  income  equal  to  the  increase  in 
the  market  value  of  their  shares  arising  from  the  increase  of 
the  capital  owned  by  their  company. 

28.  Expenditure  of  Income.  The  income  determined  in  the 
preceding  section  is  a  certain  amount  of  money  which  the  in- 
dividual can  expend  at  his  own  pleasure  without  diminishing 
his  productive  power.  There  are  two  distinct  ways  in  which 
he  can  spend  it : 

I.  In  sustenance  for  himself,  his  family  and  friends. 

II.  In  increasing  the  amount  of  capital  which  he  possesses. 

We  have  found  his  net  income  by  subtracting  from  the  to- 
tal monetary  flow  to  him  the  total  payments  necessary  to  the 
transaction  of  his  business  and  the  preservation  of  his  capital. 
The  remainder  is  expended  in  the  two  ways  just  mentioned. 
We  have  then  three  great  classes  of  payments  made  by  him, 
namely : 

Payments  on  account  of  business  and  capital ; 

Payments  for  sustenance ; 

Payments  in  increase  of  capital. 

These  together  make  up  the  total  monetary  flow  from  him, 
which  is  equal  to  the  flow  to  him,  as  has  already  been  shown. 
These  flows  are  illustrated  in  the  diagram  opposite.  From 
society  to  the  merchant  goes  a  flow  of  currency  for  the  pur- 
chase of  goods.  From  the  merchant  goes  one  flow  to  the 
jobbers  who  supply  his  goods,  another  to  his  clerks,  and  an- 
other to  capitalists  who  perhaps  own  his  warehouse  or  have 
loaned  him  money.  These  flows  represent  what  he  pays  out 
on  account  of  business.  The  dotted  line  to  producers  of 
capital  represents  that  portion  of  his  flow  which  he  expends  in 
increasing  his  capital.  He  may  merely  increase  his  stock  of 
goods,  and  then,  so  far  as  he  is  concerned,  the  producers  of  his 


IV.  29.]  OF  INDIVIDUAL  INCOME  AND  EXPENDITURE.     363 

capital  are  the  jobbers  themselves.  If  he  builds  a  new  store 
with  his  profits,  these  producers  will  be  bricklayers,  carpenters, 
and  mechanics.  The  heavy  dotted  line  represents  his  pay- 


FIG.  5. 

ments  for  the  sustenance  of  himself  and  family.  The  sum 
total  of  the  five  flows  from  him  makes  up  the  single  flow  from 
society  to  him. 

29.  There  are  two  laws  of  income  which  are  fundamental  in 
economics.  In  applying  the  term  "  law  "  to  these  propositions, 
it  must  not  be  understood  that  they  are  absolutely  true,  irre- 
spective of  the  interpretation  which  may  be  put  upon  them. 
They  are  rather  to  be  regarded  as  approximations  to  general 
truths  which  require,  however,  to  be  interpreted  in  each  partic- 
ular case.  The  first  law  which  we  shall  consider  may  be  ex- 
pressed in  the  following  form : 

As  a  general  rule  the  income  which  an  individual  gains  is 
equal  to  the  value  which  he  adds  to  the  sum  total  of  produc- 
tion through  the  use  of  his  own  faculties  and  capital. 

There  is  perhaps  no  proposition  in  political  economy  which 
runs  counter  to  common  ideas  more  than  this.  It  is  a  familiar 


364  THE  SOCIETART  CIRCULATION.  [IV.  29. 

fact  that  the  largest  incomes  are  gained  by  men  whose  function 
in  production  appears  to  the  superficial  observer  quite  insig- 
nificant. From  the  point  of  view  of  the  average  man  the  labor 
is  the  sole  measure  of  the  product,  and  the  man  who  without 
labor  gets  a  portion  of  the  product  gets  it  without  rendering 
an  equivalent  service. 

Since  the  first  impulse  of  the  student  ought  to  be  to  point 
out  certain  obvious  limitations  to  this  law,  we  may  begin  by 
considering  them.  The  first  question  will  be  what  contribution 
to  production  is  made  by  a  man  who  makes  a  fortune  merely 
through  operations  in  the  stock  market.  The  answer  is  that  so 
far  as  this  man's  interests  are  concerned,  the  case  is  truly  an 
exception.  If  the  operations  were  merely  speculative — that  is, 
if  there  has  been  no  real  change  in  the  value  of  the  stock — the 
people  with  whom  he  has  been  dealing  have  lost  an  equal 
amount.  Therefore  the  algebraic  sum  total  of  the  gains  of  all 
the  classes  engaged  in  these  speculations  will  be  zero.  Now, 
as  already  pointed  out,  we  are  in  political  economy  principally 
concerned  with  sums  total  and  not  merely  with  the  interests  of 
this  or  that  individual.  Hence  this  error  will  not  affect  the 
sum  total. 

Let  us  suppose,  in  the  second  place,  that  our  operator  has  pur- 
chased a  stock  supposed  to  be  worthless  and,  having  held  it  a 
year  or  two,  it  has  without  any  effort  on  his  part  become  of  great 
value.  This  means  that  it  has  become  useful  to  mankind  while 
he  was  the  owner.  In  order,  therefore,  that  the  law  may  be 
correctly  applied  we  must  include  in  production  all  increase  of 
value  produced  by  any  circumstance  whatever,  and  must  credit 
this  increase  to  the  owner  of  the  object  whose  usefulness  was 
enhanced.  This  remark  applies  to  all  cases  of  the  ownership 
of  land,  real  estate,  machinery,  ores,  etc.,  the  value  of  which 
may  change  without  the  application  of  labor,  merely  through 
the  movement  of  population  and  the  action  of  supply  and  de- 
mand. The  law  must  therefore,  in  order  to  be  correct,  be  un- 
derstood in  some  such  form  as  this  :  The  total  income  of  the 
community  comprises  all  the  values  produced  by  its  labor  plus 


IV.  30.]  OF  INDIVIDUAL  INCOME  AND  EXPENDITURE.     365 

all  the  increase  in  the  value  of  fixed  property  brought  forth 
without  labor  minus  all  the  decay  in  value  which  has  occurred. 
Leaving  out  speculative  operations,  gambling,  etc.,  which  mere- 
ly change  the  ownership  of  property,  every  man's  income  is  then 
the  measure  of  what  he  adds  to  the  total  production. 

The  most  simple  consideration  by  which  the  law  can  be 
illustrated  is  this :  no  person  can  gain  income  except  by  selling 
to  some  other  person  something  which  this  other  person  for 
the  time  being  considers  to  be  an  equivalent.  Take  for  in- 
stance the  case  of  a  railroad  manager  who  is  worth  many  mil- 
lions of  dollars.  If  he  has  not  gained  this  fortune  by  knock- 
ing people  down  and  picking  their  pockets,  or  by  burglary, 
which  of  course  we  assume,  then  he  must  have  gained  every 
dollar  through  some  person  paying  a  dollar  for  his  services. 
All  his  millions  have  been  gained  from  the  millions  of  people 
who  travel  on  his  road  and  the  thousands  who  purchased  its 
stock,  and  every  one  of  these  millions  and  thousands  paid  his 
dollars  because  he  thought  it  advantageous  to  himself  so  to 

o  o 

do.  He  was  either  gaining  an  advantage  or  saving  himself 
from  a  disadvantage.  He  either  reached  his  place  of  business 
betimes  in  the  morning,  or  he  was  saved  the  expense  of  having 
to  stay  in  the  city  overnight,  or  of  hiring  a  carriage  to  take 
him  home. 

3O.  SECOND  LAW  OF  INCOME.  The  entire  amount  paid  by 
the  purchaser  for  any  commodity  may  be  considered  to  be 
divided  as  income  among  the  persons  who  have  been  instru- 
mental in  the  production  of  that  commodity,  each  man's 
share  being  his  compensation  for  the  labor  expended  and 
capital  employed  in  such  production. 

We  may  show  this  most  easily  by  a  diagram  of  the  flow 
pertaining  to  an  expenditure  of  $100  in  the  purchase  of  boots. 
Let  us  suppose  that  the  raw  material,  principally  leather,  which 
the  shoemaker  consumed  in  making  the  boots  cost  $40 ;  and 
that  he  had  to  pay  $20  to  an  assistant  and  $5  to  the  owner  of 


TUB  SOCIETARY  CIRCULATION. 


[IV.  30. 


his  shop  as  rent.     This  would  leave  $35  as  his  own  income 

from  the  boots. 

The  payment  made  to  his  assistant  and  shop-owner  may,  for 

simplicity,  be  considered  as  made  solely  on  account  of  their 

services.  In  the  case  of  the 
owner  the  services  did  not 
merely  consist  of  labor,  but 
principally  of  the  interest  on 
the  capital  he  had  invested 
in  the  shop.  We  may,  if  we 
choose,  consider  the  income 
from  capital  as  a  separate 
item,  but  there  is  no  need  of 
our  doing  it  now. 

We  have  left  the  $40 
which  the  shoemaker  paid  to 
the  leather-dealers  for  raw 
material.  This  is  divided  in 
the  same  way  between  the 
owner  of  a  shop,  the  dealer's 
clerks,  the  tanner  from  whom 
he  purchased  his  leather,  and 
himself.  The  division  which 
we  assume  is  shown  on  the 
diagram  as  $3  going  to  one 
party,  $7  to  another,  and  $20 
to  the  third,  while  $10  is 
kept  as  his  own  income. 

The  $20  which  he  pays  the 
tanner  is  divided  according 
to  the  same  system.  In  each 

Fio.6.  ,  ,.  J 

class  of  persons  represented 

by  the  circles  is  given  their  portion  of  the  money.  Follow- 
ing the  flow  to  the  bottom,  we  see  that  the  division  of  the 
$100  contributes  incomes  as  follows  : 


IV.  30.]  OF  INDIVIDUAL  INCOME  AND  EXPENDITURE.     367 

To  the  shoemaker $35 

To  the  journeyman  shoemaker 20 

To  the  owners  of  shops 8 

To  the  leather-dealer 10 

To  the  leather-dealer's  clerks 7 

To  the  tanner 5 

To  the  producers  of  bark 5 

To  the  tanner's  assistant 5 

To  the  dealer  in  hides,  his  clerks,  the  railway  owners,  the  drovers,  and 

the  cowboys,  each  $1,  making.  .• 5 

Total $100 

An  important  question  may  arise  at  this  point.  The  money 
paid  to  the  purchaser  did  not  divide  itself  in  this  way  in  a  con- 
tinuous stream,  because  the  chances  are  that  the  shoemaker 
paid  the  wages  and  rent,  and  purchased  his  leather,  before  he 
sold  his  boots.  The  same  thing  may  be  true  all  the  way  down 
the  diagram,  so  that  we  are  apparently  tracing  the  process  in  a 
reverse  order.  If  the  boots  had  all  burned  up  before  they 
were  purchased,  the  greater  part  of  the  persons  represented 
would  have  received  their  income. 

But  this  does  not  contravene  the  law  laid  down.  It  still 
remains  true  that  the  income  of  the  shoemaker  is  found  by 
subtracting  the  $65  which  he  had  previously  paid  out  from 
the  $100  which  he  received.  The  same  is  true  all  the  way 
down,  so  that  the  numbers  still  correctly  represent  incomes. 

On  the  other  hand,  when  we  consider  the  future  we  shall  see 
that  the  money  paid  by  the  purchaser  of  the  boots  is  a  very 
necessary  part  of  the  future  income  of  all  concerned  in  pro- 
ducing them.  The  shoemaker  cannot  keep  up  his  purchase 
of  leather  or  his  payments  to  others  unless  he  can  sell  his  pro- 
ducts. Moreover,  as  a  general  rule,  so  long  as  he  continues 
his  sales  he  will  continue  his  purchases.  Thus  the  interdepen- 
dence of  the  various  incomes  is  a  necessary  result  of  the  case. 

The  following  important  corollary  may  be  deduced  from  the 
preceding  law  :  When  the  price  of  goods  rises,  it  is  certain 
that  some  one  concerned  in  their  production  is  receiving  an  in- 
creased income  for  his  services,  and  vice  versa. 


36S  TUB  SOCIETARY  CIRCULATION.  [IV.  80. 

The  division  of  this  increase  of  income  among  the  different 
parties  concerned  is  partly  a  question  of  interpretation.  If, 
next  month,  the  shoemaker  gets  $120  for  the  same  boots 
which  he  sold  for  $100  the  present  month,  we  may  consider 
that  increase  of  income  as  confined  to  himself,  because  he  got 
his  leather  and  employed  his  help  at  old  prices.  But  the 
general  fact  will  be  that  he  could  not  command  this  increased 
price  unless  leather  became  dearer.  Therefore  in  the  future 
lie  must  pay  the  higher  prices,  and  thus  the  increased  income 
will  be  divided  among  most  or  all  of  the  producers. 

The  results  of  the  above  two  laws  may  be  combined  in  the 
following  conclusions : 

w 

I.  Every  mass  of  finished  or  unfinished  products  may  be 
regarded  as  the  joint  work  of  the  various  persons  whose  ser- 
vices were  necessary  to  the  production. 

II.  The  value  of  all  such  products  in  the  country  may  be 
divided  among  the  producers  into  shares,  each  share  being 
apart  of  the  income  of  the  person  who  contributes  that  share 
to  tJie  product. 

III.  CONVERSELY,  we  may  consider  every  man's  income  to 
represent  his  contribution  to  the  sum  total  of  the  product,  and 
to  measure  his  right  to  take  an  equal  value  of  the  products  of 
others  from  that  sum  total. 


IV.  31.]  DEMAND  *15  TIIE  DIRECTOR  OF  INDUSTRY.         369 


CHAPTER  VI. 

DEMAND   AS   THE    DIKECTOB   OF   INDUSTRY. 

31.  THE  members  of  the  community  generally  believe  that 
the  public  interests  are  deeply  affected  by  the  way  in  which 
people  spend  their  money.  This  belief  arises  from  the  suppo- 
sition that  the  spender  confers  a  marked  benefit  on  the  person 
from  whom  he  buys.  It  is  supposed  that  if  he  spends  his 
money  in  clothing,  tailors  are  benefited  ;  if  he  spends  it  in 
shoes,  shoemakers  are  benefited  ;  if  he  carries  it  abroad,  the 
whole  community  lose  the  benefit  he  might  have  conferred 
upon  it ;  if  he  employs  Chinese  cheap  labor,  the  Anglo-Saxon 
race  are  the  losers;  and  if  he  invests  it,  nobody  but  himself  gets 
any  benefit  from  it.  In  what  respects  these  current  popular 
doctrines  are  erroneous  will  appear  subsequently.  We  begin 
by  considering  the  question  of  the  effects  of  different  kinds  of 
expenditure  from  an  economic  point  of  view,  without  reference 
to  preconceived  opinions.  The  investigation  is1  one  of  the  most 
intricate  in  economics,  and  requires  for  its  prosecution  that  we 
have  clearly  in  mind  a  number  of  conclusions  already  drawn  in 
previous  chapters.  These  conclusions  we  shall  now  re-state  for 
the  sake  of  clearness. 

I.  The  necessary  conditions  of  general  prosperity  are  that  a 
sufficiency  of  the  necessaries  of  life  to  support  the  whole  com- 
munity should  be  produced,  and  that  each  member  should  be 
able  to  command  such  portion  as  he  is  entitled  to  under  the  laws 
which  govern  the  social  organism.  A  sufficiency  of  a  commod- 
ity is  all  that  is  required.  There  is  no  need  of  piling  up  more 
food  than  the  whole  community  can  eat,  nor  of  making  more 
clothes  than  they  can  wear  out.  Therefore  increasing  prosper- 
ity is  marked,  not  by  an  unlimited  increase  of  the  more  com- 
mon necessaries  of  life,  but  by  gradual  improvements  in  the 
24 


370  THK  80CIETART  CIRCULATION.  [IV.  81. 

quality  of  these  necessaries,  and  in  the  quantity  of  those  arti- 
cles which  are  commonly  considered  luxuries.  It  will  of  course 
be  understood  that  no  line  can  be  drawn  between  necessaries 
and  luxuries.  These  do  not  form  two  classes  of  things,  but  the 
quality  of  being  a  luxury  must  be  regarded  as  one  which  dif- 
ferent objects  possess  in  different  degrees.  When  a  man  makes 
the  first  step  upward  in  the  social  scale,  it  is  not  by  sleeping 
in  two  straw  beds  after  having  formerly  slept  in  one,  but  by 
sleeping  in  a  better  kind  of  bed.  He  substitutes  finer  for 
coarser  clothing,  and  a  family  carriage  for  a  cart.  As  he  ad- 
vances, a  silver  watch  comes  into  his  possession,  which,  in  time, 
is  replaced  by  a  gold  one.  He  may  have  no  more  chairs  than 
he  had  before,  but  they  are  of  better  quality,  and  books  and 
pictures  are  added  to  the  embellishments  of  his  house.  Lace  cur- 
tains take  the  place  of  the  cotton  ones  on  his  windows,  and  his 
books  at  last  go  into  a  walnut  case.  The  prosperity  of  any  one 
man  is  improved  when  he  can  add  comforts  possessing  in  a 
higher  degree  the  quality  of  luxuries;  and  any  class  of  men  is 
prosperous  when  all  of  its  members  are  prosperous.  Since,  by 
the  natural  laws  of  supply  anid  demand,  those  things  are  made 
which  people  most  want  and  can  best  afford  to  buy,  it  follows 
that  general  prosperity  is  marked  by  a  general  increase  in  the 
effectiveness  of  industry,  arid  that  we  must  expect  this  increase 
of  industry  to  show  itself  in  the  production  of  articles  which 
to  the  lowest  grade  of  men  would  appear  luxuries. 

So  much  for  production  in  so  far  as  it  concerns  the  ability  of 
each  man  to  get  command  of  his  share  of  the  product.  We 
have  already  shown  that  in  the  state  of  things  which  now  exists 
in  this  country  it  is  scarcely  possible  for  any  industrious  man 
to  suffer  for  the  necessaries  of  life.  The  only  persons  who  can 
so  suffer  are  those  so  weak,  miserable,  and  worthless  that  they 
cannot  or  will  not  do  anything  which  anybody  else  wants  to 
have  done,  or  who  set  so  high  a  price  on  their  services  that 
they  can  get  nobody  to  employ  them. 

II.  We  call  to  mind  that  the  primary  form  of  capital  may  be 
considered  as  sustenance  for  laborers  ;  that  is,  food  for  them  to 


IV.  81.]   DEMAND  AS  THE  DIRECTOR  OF  INDUSTRY.         371 

eat,  clothing  for  them  to  wear,  and  houses  for  them  to  live  in. 
In  an  economic  sense  the  class  laborer  includes  every  person 
who  gains  a  living  by  his  own  exertions,  and  does  not  live  off 
the  interest  of  his  money,  or  the  profits  on  his  investments. 
Clergymen  and  teachers  are  therefore  included  in  the  class,  as 
well  as  mechanics  and  hod-carriers. 

We  also  call  to  mind  that  when  the  laborer  receives  money 
in  exchange  for  work  done,  this  money  may  be  regarded  as  an 
order  on  owners  of  sustenance  to  supply  the  laborer  with  a  cor- 
responding quantity  of  that  sustenance.  This  order  is  ad- 
dressed to  the  house-owner,  who  receives  it  as  rent ;  to  the 
owner  of  flour,  who  gives  flour  in  exchange  for  it ;  and  to  the 
clothier,  who  gives  clothes  for  it. 

In  order  that  the  work  of  the  laborer  may  be  profitable,  the 
value  of  his  product,  whatever  it  may  be,  must  exceed  the 
value  of  all  the  sustenance  which  he  and  his  family  consume. 
The  measure  of  the  laborer's  prosperity  is  the  quality  of  the 
sustenance  which  he  is  able  to  command. 

III.  The  demand  for  various  kinds  of  commodities  fluctuates 
from  month  to  month  and  from  year  to  year.     There  is  there- 
fore a  corresponding  fluctuation  in  the  industry  which  pro- 
duces those  commodities.     It  has  been  shown  that  these  fluctua- 
tions in  industry  may  be  represented  by  supposing  laborers  who 
are  engaged  in  producing  one  class  of  goods  to  change  their  oc- 
cupation and  produce  the  other  class.     This  change  can  be  ef- 
fected either  directly,  by  laborers  changing  their  occupation,  or 
indirectly,  by  employing  more  new  labor  in  the  new  occupation. 
The  result  is  the  same  in  the  two  cases  (as  shown  in  II.  49). 
The  restrictions  to  which  this  change  of  industry  is  subject  have 
also  been  pointed  out,  and  it  has  been  shown  that  the  only  case 
in  which  any  difficulty  is  met  with  in  effecting  the  change  of 
employment  arises  when  a  higher  order  of  skill  is  demanded. 

IV.  It  is  also  necessary  that  the  reader  should  have  clearly 
in  mind  the  monetary  circulation  as  described  in  the  last  two 
chapters,  and  the  distinction  between  the  current  measure  of  de- 
mand and  the  absolute  measure.     The  main  proposition  to  be 


372  THE  SOCIETART  CIRCULATION.  [IV.  82. 

had  in  mind  in  this  connection  is  that  demand  depends  upon 
the  ratio  between  the  flow  of-  the  circulation  and  the  price 
asked  ;  that  when  the  flow  diminishes,  either  through  a  dimi- 
nntion  of  the  volume  of  currency,  or,  what  amounts  to  the 
same  thing,  through  a  diminution  of  its  rapidity  of  circulation, 
a  general  falling  off  in  the  demand  for  commodities  in  general 
is  a  necessary  result ;  also  that  this  falling  off  lias  its  natural 
remedy  in  a  corresponding  diminution  in  the  general  scale  of 
prices,  which  will  immediately  restore  the  demand  without  any 
general  change  in  the  ability  of  different  classes  of  men  to  com- 
mand the  means  of  subsistence. 

32.  If  in  the  monetary  circulation  we  consider  a  payment 
from  one  person  A  to  another  person  B,  we  may  inquire  what  B 
does  with  the  identical  money  he  thus  receives,  and  may,  in  im- 
agination, trace  it  through  the  different  streams  passing  from  B 
to  other  members  of  the  community.  From  each  member  the 
stream  will  subdivide  itself  amongst  other  members,  and  so  on 
indefinitely,  but  its  total  magnitude  will  remain  unchanged. 
For  example,  we  may  imagine  that  a  sum  of  five  dollars  being 
paid  to  B,  he  pays  one  dollar  of  it  to  each  of  five  persons.  If 
each  of  these  persons  divides  it  among  four  other  persons,  there 
will  be  twenty  in  all  who  will  each  receive  twenty-five  cents 
of  that  money.  If  each  of  these  twenty  persons  divide  the 
money  among  five  others,  we  shall  have  one  hundred  persons 
each  receiving  five  cents.  In  every  case  the  total  volume  of 
all  the  little  streams  which  we  consider  amounts  constantly 
to  five  dollars.  Of  course  in  practice  the  division  would  be 
unequal,  but  this  would  not  affect  the  result  when  we  add  up 
all  the  payments. 

It  may  be  asked,  How  shall  we  distinguish  this  particular  five 
dollars  from  all  the  other  money  flowing  from  B  ?  The  latter 
•was  perhaps  in  receipt  of  hundreds  of  dollars  from  other  par- 
ties ;  he  puts  the  five  dollars  he  receives  from  A  into  his  gen- 
eral fund,  and  thus  mixes  it  up  in  such  a  way  that  we  cannot 
distinguish  between  this  particular  sum  and  the  other  money. 


IV.  32.]   DEMAND  AS  THE  DIRECTOR  OF  INDUSTRY.         373 

The  answer  to  this  is  that  we  learn  what  B  does  with  that  par- 
ticular five  dollars  by  inquiring  in  what  streams  the  deficiency 
would  have  been  found  had  he  not  received  that  five  dollars 
from  A.  It  is  mathematically  certain  that  if  he  had  not  re- 
ceived it  he  would  have  had  that  much  the  less  to  pay  out  to 
others ;  so  that,  taking  all  his  payees  together,  it  is  certain  that 
five  dollars  more  are  received  than  would  have  been  received 
by  them  had  A  not  made  this  payment.  What  is  true  of  these 
payees  is  true  of  their  payees  ;  there  is  a  deficiency  in  the 
stream  amounting  to  this  sum,  how  far  soever  we  trace  it. 

Having  thus  considered  the  effects  of  cutting  off  this  stream, 
so  far  as  it  concerns  those  to  whom  it  would  have  flowed  had 
it  not  been  cut  off,  let  us  consider  the  consequence  in  another 
direction.  If  A  had  not  made  that  payment  to  B  he  would 
have  had  five  dollars  more  either  to  keep  or  to  spend  for  some 
other  purpose.  Let  us  first  consider  the  case  in  which  he 
spends  it  in  some  other  way.  Then  his  flow  to  some  third 
person,  C  for  example,  would  have  been  increased  by  the  same 
amount  that  his  flow  to  B  is  diminished.  He  pays  either  to  B 
or  to  C,  but  not  to  both.  We  may  in  imagination  trace  the  pay- 
ment from  A  through  C  and  then  see  it  subdivided  amongst 
different  classes  of  persons  in  the  same  way  that  we  did  when 
it  went  through  B. 

The  conception  that  we  must  now  form  is  this :  We  imagine 
A  holding  his  five  dollars  and  deliberating  whether  he  shall 
issue  it  to  B  or  to  C.  Whichever  of  the  two  he  decides  shall 
receive  it,  we  may  trace  it  from  the  receiver  as  it  subdivides 
itself  among  other  members  of  the  community.  We  may  sup- 
pose it,  after  two  or  three  payments,  to  be  subdivided  among 
the  same  persons,  whether  paid  to  B  or  to  C.  After  it  reaches 
those  same  persons  the  effects  will  be  the  same.  Any  economic 
difference  that  may  result  from  the  two  directions  will  take 
place  while  the  streams  are  divided,  and  before  they  join  by 
reaching  the  same  parties.  This  conception  of  the  stream  ulti- 
mately reaching  the  same  persons  in  whichever  way  paid  is 
introduced  for  simplicity.  As  a  matter  of  fact  and  reason. 


374  TUB  SOCIETAHY  CIRCULATION.  [IV.  83. 

when  divided  among  so  many  men  that  each  one's  share  is  in- 
considerable, we  may  consider  it  as  having  reached  the  same 
persons. 

33.  Purchase  of  Commodities  and  Demand  for  Labor. 
In  all  that  precedes  we  have  made  no  classification  of  pay- 
ments according  to  their  object.  A  distinction  is,  however, 
made  by  economists  between  payments  to  laborers  for  their 
services  and  payments  for  commodities  already  produced. 
The  ground  of  this  distinction  is  this  :  the  capital  with  which 
commodities  are  produced  is  not  the  money  received  for  sell- 
ing them,  but  the  sustenance  which  the  laborers  consumed 
while  making  them.  Hence  the  payments  which  support 
labor  are  not  those  made  to  the  seller  of  goods,  but  those 
made  to  laborers  to  enable  them  to  purchase  sustenance.  If, 
then,  we  consider  only  the  latter  class  of  payments,  we  must 
follow  the  stream  of  currency  through  the  parties  who  sell 
goods  until  we  find  it  to  reach  laborers  who  receive  it  as  wages 
and  who  purchase  sustenance  with  it. 

This  is  what  we  have  done  in  the  preceding  chapter,  where 
we  have  shown  that  every  payment  for  goods  purchased  may 
be  considered  as  divided  as  wages  and  interest  among  those 
instrumental  in  their  production. 

Let  us  now  return  to  the  question  how  we  may  suppose  a 
payment  from  A  to  B  to  be  divided  by  the  latter  amongst  his 
employes  with  a  view  of  finding  what  laborer  it  reaches.  It 
is  an  obvious  rule  of  business  that  if  a  manufacturer  finds  he 
cannot  sell  a  particular  class  of  goods,  he  stops  making  those 
goods.  If  he  finds  goods  sell  well,  he  spends  the  money  which 
he  receives  for  them  in  helping  his  operatives  to  replace  the 
stock  which  is  sold  out.  Since  manufacturers  will  not  allow 
unsold  goods  to  accumulate  without  limit,  and  indeed  will 
make  none  except  what  they  can  sell,  we  may  consider  every 
person  who  purchases  goods  of  any  particular  class  as  placing  in 
the  manufacturer's  hands  the  power  and  inducement  to  replace 
these  goods  by  employing  men  to  make  a  fresh  supply  of  them. 


IV.  34.]   DEMAKD  AS  TUE  DIRECTOR  OF  INDUSTRY.         375 

34.  We  now  reach  the  following  fundamental  law  of  em- 
ployment :  A  change  of  demand  from  one  commodity  to 
another  may  always  be  met  by  a  corresponding  change  of  labor 
from  the  production  of  the  one  commodity  to  that  of  the  other 
in  so  far  as  this  change  is  possible. 

The  way  in  which  the  change  is  brought  about,  and  the  condi- 
tions to  which  it  is  subject,  have  been  set  forth  in  II.  49,  50. 
Let  A  be  an  agent  who  has  money  to  spend,  M  a  shoemaker, 
and  T  a  tailor.  Also  let  S  be  the  collection  of  the  individuals 
from  whom  the  tailors  and  shoemakers  may  purchase  their  sup- 
plies. Then  if  the  agent  purchases  from  the  tailors,  the  latter 
will  spend  the  money  so  received  for  food,  clothing,  and  other 
necessaries,  as  well  as  for  the  means  of  continuing  their  busi- 
ness. This  expenditure  is  repeated  by  a  continuation  of  the 
stream  from  M  to  S,  S  representing  the  community  in  general. 
But  suppose  the  spender,  instead  of  purchasing  clothes,  pur- 
chases shoes.  Then  his  money,  instead  of  going  to  the  tailor  T, 
will  go  to  the  shoemaker  M.  If  now  the  equilibrium  of  supply 
and  demand  was  exact  when  the  purchase  Avas  made  from  the 
tailor,  then  the  result  of  buying  from  the  shoemaker  will  be 
that  a  certain  amount  of  tailoring  industry  is  left  out  of  em- 
ployment, while  there  is  a  demand  for  an  additional  supply  of 
the  labor  of  shoemakers.  To  fix  the  idea,  let  us  suppose  that  A 
represents  a  number  of  persons  such  that  the  demand  in  ques- 
tion will  be  represented  by  the  services  of  a  single  person.  If 
then  a  single  tailor  can  change  his  business  to  that  of  making 
shoes,  he  will  receive  the  same  money  as  before,  and  will  spend 
most  of  it  among  the  same  people  as  before.  The  supply  and 
demand  will  then  be  perfectly  equalized,  and  the  monetary 
circulation  among  all  the  people  of  the  community  will  be  the 
same  as  before.  "What  A  has  done  has  been  to  change  the  in- 
dustry of  one  man  from  that  of  shoemaking  to  that  of  making 
clothes. 

We  have  already  shown  how  and  under  what  conditions  this 
change  can  be  brought  about.  We  call  to  mind  that  there  is 
no  necessity  that  any  individual  tailor  should  change  his  occu- 


370 


THE  SOCIETARY  CIRCULATION. 


[IV.  34. 


pation  for  that  of  a  shoemaker.  Some  third  person  may  have 
adopted  the  trade  of  shoemaker,  and  the  tailor  may  take  his 
place,  or  there  may  be  a  series  of  changes,  as  already  explained 
in  treating  of  changes  of  occupation.  Finally,  some  tailor  may 
die  and  the  person  who  otherwise  would  have  iilled  his  place 
mav  learn  to  make  shoes.  But  in  whatever  way  the  change 
comes  about,  the  final  result  will  be  the  same  as  if  some  one 
tailor  had  changed  his  occupation  to  that  of  a  shoemaker. 
The  effect  of  this  change  of  expenditure  is  shown  in  the  dia- 
gram, which  now  includes  not  merely 
a  single  flow,  as  our  former  diagrams 
have,  but  two  alternate  flows.  On 
the  right  hand  the  accented  letters 
represent  the  flows  which  formerly 
went  through  the  tailors.  From  the 
asent  A  went  the  flow  a'  to  the  tail- 

O 

ors,  among  whom  of  course  we  in- 
clude the  merchants  who  sold  the 
clothes.  This  flow  subdivides  itself 
into  two,  V  and  c',  the  former  being 
the  payment  for  the  subsistence  of 
the  tailors,  and  the  latter  that  portion 
of  the  payment  which  went  to  the 
parties  who  supplied  the  cloth  and 
the  wool.  These  parties  got  the  wool 
from  certain  sheep-raisers,  and  the 
flow  d'  represents  the  payment  to 
them. 

Now  when  A  ceases  to  buy  these  particular  clothes,  the 
latter  flows  all  stop.  In  lieu  of  a'  we  have  an  equal  flow  a 
going  to  the  shoemakers.  We  therefore  suppose  a  passage  of 
certain  men  from  the  ranks  of  the  tailors  to  those  of  the  shoe- 
makers. To  show  that  this  passage  may  be  indirect,  we  draw 
a  blank  circle  between  them,  which  may  be  considered  as  rep- 
resenting the  community  at  large,  or  that  portion  of  the  com- 
munity which  is  looking  for  something  to  do.  The  unemployed 


Fio. 


IV. 35.]   DEMAND  AS  THE  DIRECTOR  OF  INDUSTRY.         377 

tailors  pass  into  that  class,  and  the  shoemakers  pass  out  of  it,  so 
that  it  remains  unchanged  in  number. 

Since  shoemakers  consume  the  same  subsistence  as  tailors,  the 
flow  b  for  that  subsistence  is  the  same  as  the  flow  b',  so  that  the 
interests  of  society  at  large  are  unaffected.  In  lieu  of  the  flow 
c  to  the  cloth  and  wool- dealers,  we  have  a  flow  c  to  the  leather- 
makers.  Therefore  there  must  be  a  change  from  the  business 
of  dealing  in  wool  to  that  of  making  or  dealing  in  leather. 

In  lieu  of  the  flow  d'  to  the  sheep-raisers,  we  have  the  flow 
d  to  the  cattle-raisers.  It  is  as  easy  to  raise  cattle  as  sheep,  and 
the  balance  is  made  good  by  a  sufficient  number  of  cattle  being 
substituted  for  sheep. 

The  point  mainly  to  be  kept  in  mind  is  that  the  totality  of 
demand  is  unchanged  by  the  change  of  expenditure.  There  is 
a  greater  demand  for  those  classes  of  services  or  commodities 
on  the  left  side  of  the  diagram,  and  a  less  demand  for  those  on 
the  right  side.  The  compensation  is  effected  by  the  passage  of 
a  limited  number  of  men  from  those  on  the  right  to  those  on 
the  left,  and  the  interests  of  society  at  large  remain  unchanged. 

35.  Case  of  Non-competing  Groups.  The  question  may 
arise,  What  would  be  the  effect  if  the  change  of  expenditure 
by  A,  instead  of  being  directed  to  commodities  made  by  the 
same  classes  of  men  as  before,  should  be  directed  to  those 
made  by  a  non-competing  group  whose  ranks  tailors  could 
not  join?  Suppose,  for  example,  that  in  lieu  of  shoemakers 
the  parties  employed  were  professors  of  Sanscrit  and  Hebrew. 
Not  only  could  the  tailors  never  learn  to  teach  Sanscrit  or  He- 
brew, but  it  is  not  likely  that  there  could  be  any  relation  by 
which  the  tailor  should  take  any  place  occupied  by  such  a 
teacher  in  the  blank  circle.  The  result  would  be  a  general 
falling  off  in  the  demand  for  the  work  of  tailors,  and  an  in- 
crease in  the  demand  for  professors  of  Sanscrit. 

It  may  appear  that  since  the  professors  of  Sanscrit  must  be 
clothed,  there  will  be  a  flow  from  them  to  the  tailors  to  com- 
pensate for  the  loss  of  the  flow  from  A.  But  examination  will 


378  TUB  SOCIETART  CIRCULATION,  [IV.  86. 

show  us  that  such  is  not  the  case.  The  professors  of  Sanscrit 
must  have  been  clad  before,  and  will  need  few  or  no  more 
clothes  after  their  change  of  employment  than  they  did  before. 
Moreover,  their  entire  income  is,  by  hypothesis,  taken  out  of 
the  flow  which  formerly  went  to  the  tailors,  and  under  any 
circumstances  they  spend  but  a  small  fraction  of  that  income 
for  clothes.  There  is  therefore  an  actual  increase  in  the  de- 
mand for  the  labor  of  teaching  Sanscrit,  and  a  diminished 
demand  for  that  of  making  clothes,  which,  so  far  as  this  par- 
ticular operation  is  concerned,  cannot  be  compensated. 

To  learn  the  complete  effect  of  the  change  upon  society  we 
ought  to  know  what  the  professors  were  doing  before  A 
employed  them.  They  probably  left  some  other  employer,  E, 
and  thus  the  flow  to  them  from  E  was  stopped,  to  be  replaced 
by  the  flow  from  A.  If,  after  the  change,  this  flow  from 
E  should  pass  to  tailors,  shoemakers,  etc.,  the  compensation 
would  be  complete,  the  only  change  being  that  the  professors 
of  Sanscrit  would  now  be  paid  out  of  a  new  flow.  But  this 
would  be  really  no  change  at  all,  so  far  as  the  interests  of 
classes  are  concerned,  but  only  an  interchange  of  two  flows. 
What  we  are  considering,  however,  is  not  a  change  of  this 
sort,  but  an  actual  change  by  A  from  demanding  clothes  to 
demanding  the  teaching  of  Sanscrit,  uncompensated  by  any 
reverse  change  by  other  people.  The  undoubted  result  is  that 
already  set  forth.  So  far  as  immediate  income  is  concerned, 
one  class  is  better  and  another  worse  off.  There  are  indeed 
ulterior  effects,  but  these  are  to  be  considered  in  subsequent 
chapters. 

36.  Other  Forms  of  Expenditure.  We  have  been  compar- 
ing the  effects  of  different  modes  of  expenditure,  and  we  have 
shown  that  the  sum  total  of  the  demand  for  labor  is  the  same 
whether  one  spends  his  money  for  one  kind  of  labor  or  suste- 
nance or  another  kind.  But  there  are  still  two  cases  to  be  con- 
sidered. What  will  the  effect  be— 

1.  When  A,  instead  of  spending  his  money  by  demanding 


IV.  36.]    DEM  AS D  AS  THE  DIRECTOR  OF  INDUSTRY.         379 

services  from  the  social  organism  to  which  he  belongs,  sends  it 
abroad,  or  melts  it  into  jewelry ;  that  is,  when  he  simply  stops 
the  flow  a  from  himself,  and  so  employs  nobody  in  place  of 
the  tailors  ? 

2.  When,  instead  of  spending,  he  invests  it  in  some  form  of 
capital  ? 

The  modifications  in  our  conclusions  when  the  act  of  demand 
is  thus  modified  will  form  the  subject  of  the  next  three  chap- 
ters. 

EXERCISES. 

1.  Draw  diagrams  showing  the  effects  of  the  following  changes  of  ex- 
penditure, and  the  corresponding  changes  of  labor.  Show  also,  in  each 
case,  whether  the  change  can  be  made  without  disadvantage. 

1.  A  man  who  has  been  collecting  a  library  stops  buying  books  and 
spends  the  same  income  in  building  houses. 

II.  The  inhabitants  of  a  city  who  have  been  getting  their  streets  graded 
aud  paved  stop  that  expenditure  and  spend  the  same  income  upon  the 
erection  of  a  city  hall. 

III.  A  body  of  men  \vho  have  been  clothing  themselves  expensively 
stop  buying  new  clothes  and  expend  the  money  thus  saved  in  giving  din- 
ners to  their  friends. 

IV.  A  body  of  men  in  New  York  stop  building  railways  and  invest  the 
income  thus  saved  in  building  iron  ships. 

V.  A  man  who  has  been  spending  his  income  in  keeping  an  expensive 
house  bequeaths  his  property  to  a  college. 

2.  After  the  burning  of  Chicago  what  classes  of  men  probably  left  the 
city,  and  what  classes  went  thither  to  find  profitable  employment? 

3.  If  the  government  of  New  York  State  had  never  undertaken  the 
building  of  the  new  capitol  at  Albany,  in  what  way  would  the  demand 
for  labor  have  been  different  from  what  it  is? 

4.  When  n  government  borrows  money  from  a  body  of  capitalists  who 
have  been  building  railways,  and  expends  it  in  war,  what  change  in  the 
occupation  of  men  does  it  bring  about? 

6.  When  the  State  of  Virginia  borrowed  money  from  citizens  of  New 
York,  and  spent  it  in  internal  improvements,  what  change  in  occupation 
and  what  movement  of  population  was  brought  about? 


380  TUB  SOCIETART  CIRCULATION.  [IV.  87. 


CHAPTER  VII. 

EFFECT  OF   A   DIMINUTION   IN  THE   FLOW   OF  THE   CURRENCY. 

37.  OUR  answer  to  the  question  what  will  happen  in  case  of 
a  withdrawal  of  currency  from  the  regular  flow,  and  a  conse- 
quent diminution  of  that  flow,  depends  upon  principles  which 
have  already  been  developed  in  the  preceding  chapters.  But 
it  will  conduce  to  clearness  to  combine  these  principles  in  a  new 
form  and  apply  the  result  to  this  special  question.  The  imme- 
diate effect  is  very  obvious,  and  is  correctly  apprehended  by 
the  business  public.  The  ulterior  effect  is  not  so  obvious,  but 
is  capable  of  being  made  clear  to  any  mind  capable  of  grasping 
the  problem. 

The  immediate  effect  of  the  withdrawal  must  be  a  diminu- 
tion of  the  industrial  as  well  as  of  the  monetary  flow.  Let  us 
once  more  revert  to  the  hypothesis  of  Fig.  7.  The  consumers 
A  were  there  supposed  to  have  been  spending  their  money  for 
clothes,  thus  causing  an  industrial  flow  along  the  lines  d',  c',  5', 
and  a'  from  sheep-raisers  and  wool-dealers,  etc.,  through  tailors 
terminating  in  the  men  A.  It  was  shown  in  the  last  chapter 
how  the  change  of  A's  expenditure  from  clothes  to  shoes  now 
causes  the  industrial  flow  to  pass  along  the  veins  d,  c,  5,  a,  but 
without  causing  any  diminution  in  the  demand  for  employ- 
ment. Now  it  is  very  evident  that  if  A  does  not  spend  his 
money  in  either  of  these  directions,  nor  in  any  third  direction 
which  will  cause  a  demand  for  the  products  of  the  community, 
that  particular  branch  of  the  industrial  flow  shown  on  the  dia- 
gram will  entirely  stop.  This  will  be  the  case  if  he  sends 
his  money  abroad,  melts  it  into  jewelry,  or  deposits  it  in  a 
bank  which  does  not  loan  it  out  to  its  customers.  Hence  the 
tailors,  shoemakers,  and  producers  of  subsistence  in  general 


IV.37.]  DIMINUTION  IN  THE  FLOW  OF  THE  CURRENCY.    381 

naturally  oppose  this  policy  on  the  part  of  A,  and  desire  that 
he  shall  not  only  spend  his  money,  but  spend  it  at  home. 

Now  if  the  money  prices  of  all  commodities  or  services  were 
fixed  by  any  law  whatever,  whether  a  legislative  enactment  or 
a  provision  of  nature,  then  this  diminution  of  the  industrial 
flow  would  be  not  only  the  immediate  but  the  permanent  re- 
sult of  every  diminution  in  the  flow  of  the  currency.  But  such 
is  not  the  case.  The  ulterior  effect  is  that  the  industrial  flow 
is  restored  as  soon  as  prices  can  accommodate  themselves  to  the 
new  state  of  tilings.  To  see  this  we  must  first  remark  that 
there  is  no  law  which  prescribes  how  great  a  monetary  flow  is 
required  to  measure  or  equal  the  industrial  flow.  This  depends 
altogether  upon  the  scale  of  prices.  When  in  the  equation  of 
the  industrial  flow, 

K  x  P  =  T  X  B, 

we  have  a  diminution  in  V,  it  may  at  any  time  be  compensated 
by  a  corresponding  diminution  in  P,  without  changing  the 
actual  industrial  flow  K.  Moreover,  this  operation  of  dimin- 
ishing P,  so  as  to  keep  up  the  equation,  is  nothing  more  than 
that  of  accommodating  prices  to  demand,  as  we  have  already 
shown. 

If  then  we  suppose  that  the  change  of  expenditure  by  A 
was  equivalent  to  one  per  centum  of  the  total  expenditure  of 
the  entire  community,  it  would  follow  that  one  per  centum  of 
the  industrial  population  would  be  thrown  out  of  employment 
so  long  as  the  scale  of  prices  remained  the  same  as  before.  If 
this  one  per  centum  were  composed  wholly  of  tailors,  that  class 
alone  would  be  immediately  affected.  Finding  this  diminution 
in  the  demand  for  their  labor,  some  of  them  would  have  to  sub- 
mit to  a  reduction  of  one  per  cent  in  their  wages,  while  others 
would  seek  for  other  employments.  This  competition  for  work 
would  cause  a  fall  in  prices,  and  the  reduction  in  price  would 
cause  an  increase  of  demand.  Thus,  as  soon  as  the  equilibrium 
was  restored,  everything  would  go  on  as  before,  except  in  the 
following  points : 


382  THE  SOCIETART  CIRCULATION.  [IV.  38. 

1.  There  would  be  fewer  tailors  in  proportion  to  the  rest  of 
the  community. 

2.  Waives  would  be  one  per  cent  lower. 

3.  Goods  would  be  one  per  cent  cheaper. 

Thus  everything  would  go  on  in  its  regular  normal  way,  only 
on  a  scale  of  prices  one  per  cent  lower.  No  one  except  A  would 
in  reality  be  either  better  or  worse  off.  We  may  assume  that 
A  would  be  a  little  better  off,  because  he  bought,  instead  of 
clothing,  something  which  he  must  have  wanted  more  than  he 
did  clothes. 

In  tracing  this  effect  of  the  withdrawal  of  the  circulation  we 
have  supposed  the  withdrawal  to  be  permanent.  But  in  most 
cases  the  circulation  will  be  restored  through  the  action  of 
causes  brought  into  play  by  the  very  act  of  withdrawal.  For 
example,  if  a  portion  of  the  volume  of  currency  is  sent  abroad, 
that  very  act,  if  it  diminishes  home  and  raises  foreign  prices, 
will  lead  to  a  demand  for  our  goods  from  abroad,  and  thus  re- 
suit  in  sending  back  the  money.  The  more  money  the  owner 
deposits  in  a  bank  the  more  the  bank  will  have  to  loan.  Hence 
the  general  rule  will  be  that  the  volume  of  currency  cannot  be 
so  diminished  by  bank  deposits  as  to  cause  a  great  rise  of  prices. 
"When  prices  begin  to  fall,  that  very  fact  will  cause  men  to  seek 
for  money  in  order  to  buy,  and  thus  will  arise  a  tendency  on 
the  part  of  the  owners  of  bullion  to  get  it  coined  into  money, 
and  on  the  part  of  business  men  to  borrow  from  their  banks. 

38.  The  question  may  arise  whether,  after  all,  we  are  not 
here  dealing  with  a  general  and  serious  evil  in  that  we  are  sup- 
posing a  change  of  occupation  on  the  part  of  men  and  a  change 
in  prices  of  goods,  neither  of  which  can  take  place  without  loss 
and  friction.  This  would  be  true  if  there  were  any  system  on 
which  we  could  accurately  adjust  prices  and  demand,  so  that 
everybody  should  know  exactly  what  occupation  to  engage  in, 
and  pursue  that  occupation  all  his  life,  and  if  the  change  con- 
sisted in  a  disturbance  of  this  adjustment.  But  such  is  not  the 
case.  As  a  matter  of  fact,  changes  of  the  kind  we  have  sup- 


IV.  39.]  DIMINUTION  IN  TUE  FLOW  OF  THE  CURRENCY.    383 

posed  are  going  on  all  the  time  as  an  inevitable  result  of  the  con- 
tinual change  in  population  and  tastes,  of  old  men  dying  off  and 
new  ones  coming  on  the  stage,  of  new  modes  of  production  be- 
inw  discovered  and  new  wants  arising.  Laborers  of  all  classes 

o  o 

are  continually  making  changes  by  demanding  higher  wages  or 
better  terms  of  labor  from  their  employers,  and  every  change 
of  this  sort  is  necessarily  accompanied  by  change  of  demand. 
Prices  of  every  sort  are  therefore  always  varying  so  as  to  ac- 
commodate themselves  to  these  changing  circumstances.  It  is 
perfectly  conceivable  that  the  change  made  by  A  in  his  mode 
of  expenditure  would  be  compensated  by  a  change  in  the  oppo- 
site direction  by  some  one  else,  or  by  tailors  getting  dissatisfied 
and  going  into  other  employments  of  their  own  accord  before 
A  changed  his  demand.  In  this  case  A's  change,  instead  of 
resulting  in  the  necessity  of  a  new  adjustment  of  prices  and 
wages,  might  obviate  the  necessity  of  an  adjustment  due  to 
some  other  cause. 

Moreover,  we  have  supposed  A's  cessation  of  demand  to  be 
for  clothing  alone,  and  thus  thrown  the  whole  burden  of  the 
change  on  the  tailors.  But  this  is  an  extreme  case.  The  chances 

o 

are  that  the  demand  falls  off  equally  from  nearly  all  classes  of 
products,  and  that  the  compensation  is  effected  without  any 
material  change  of  occupation. 

39.  The  above  conclusion  is  subject  to  one  important  tem- 
porary exception.  Although  the  wholesale  prices  of  commodi- 
ties rapidly  adjust  themselves  to  variations  in  the  monetary  flow, 
there  are  certain  classes  of  services  in  which  the  adjustment 
takes  place  very  slowly  and  is  impeded  by  various  causes.  The 
salaries  of  government  officers  can  be  changed  only  by  legisla- 
tion, and  therefore  do  not  respond  to  changes  of  demand.  The 
salaries  of  employes  generally  are  to  a  certain  extent  subject 
to  the  same  rule.  They  are  fixed  by  agreement  or  custom,  and 
can  be  changed  only  after  the  pressure  has  become  so  serious  as 
to  derange  the  business  of  employers.  The  same  thing  is  true 
of  most  retail  prices.  It  has  been  shown  in  a  preceding  chapter 


384  THE  SOCIETARY  CIRCULATION.  [IV.  89. 

why  they  do  not  respond  rapidly  to  changes  in  the  market. 
No  one  expects  the  prices  of  dishes  on  Delmonico's  table  to 
rise  and  fall  with  the  market  prices  of  cattle  and  flour.  Al- 
though it  is  undoubtedly  true  that  in  the  long-run  a  permanent 
change  would  produce  its  effect,  even  at  Delmonico's,  unless 
some  other  cause  intervened  to  prevent  it,  yet  this  would  not  be 
true  immediately. 

This  resistance  to  change  modifies  in  an  important  degree 
the  effect  which  we  have  described,  and  renders  it  much  more 
injurious  to  certain  classes.  What  we  have  conclusively  shown 
is,  firstly,  that  in  the  case  of  a  diminution  in  the  monetary  flow 
this  diminution  tends  to  divide  itself  in  equal  proportions  in 
all  the  channels  of  flow;  secondly,  that  there  is  also  a  ten- 
dency  to  cause  a  uniform  fall  of  prices ;  and  thirdly,  that 
when  these  tendencies  have  full  play,  no  one  except  debtors 
and  creditors  are  either  worse  or  better  off. 

But  suppose  that  there  are  certain  channels  in  which  the 
sellers  of  services  or  commodities  are  able  to  demand  the  same 
price  as  before ;  that  is,  to  keep  up  the  same  monetary  flow  as 
before  through  the  channels  which  lead  to  themselves.  The 
inevitable  result  will  be  that  the  flow  into  other  channels  will 
be  diminished  in  an  undue  proportion,  and  that  other  persons 
must  in  consequence  suffer.  To  fix  the  ideas,  let  us  suppose 
that  the  persons  who  can  thus  command  a  constant  flow  to 
themselves  form  one  half  of  the  community,  and  that  there  is  a 
diminution  in  the  total  flow  of  10  per  cent.  Let  us  call  A  the 
half  of  the  community  who  possess  this  ability  to  keep  up  the 
flow,  and  B  the  other  half.  The  result  will  be  that  class 
A  will  command  the  same  prices  for  all  their  goods  and  ser- 
vices as  before,  while  class  B  will  find  a  diminution  of  20 
per  cent  in  the  flow  to  them.  Then  class  A  will  actually  gain, 
by  being  able  to  purchase  more  cheaply  all  the  goods  which 
class  B  have  to  furnish,  while  class  B  will  lose  to  the  same 
extent.  In  the  present  state  of  human  nature,  class  B  are 
not  going  to  submit  immediately  to  this  discrimination  against 
them;  they  therefore  determine  that  they  will  remain  idle 


IV.  39.]  DIMINUTION  IN  THE  FLOW  OF  THE  CURRENCY.  385 

rather  than  submit  to  selling  their  goods  or  services  at  so  low  a 
rate.  The  result  will  be  that  their  prices  as  well  as  those  of 
class  A  will  be  kept  up,  and  thus  there  will  be  a  diminished 
industrial  flow  from  them  corresponding  to  the  diminished 
monetary  flow  to  them.  In  short,  to  take  the  case  just  sup- 
posed, 20  per  cent  of  them  will  be  idle,  or  perhaps  all  of  them 
will  be  idle  20  per  cent  of  their  time.  Supposing  the  former 
case  to  occur,  as  it  commonly  will,  the  result  will  be  that  the 
80  per  cent  of  class  B  who  remain  at  work  will  be  in  the  same 
position  as  class  A.  Thus  we  shall  have  90  per  cent  of  the 
population  at  work  on  the  old  scale  of  prices,  and  10  per  cent 
idle,  and  looking  for  a  living  as  best  they  can  get  it. 

Such  is  the  familiar  case  presented  to  us  in  what  are  com- 
monly known  as  "  hard  times."  The  real  trouble  in  such  cases 
is  that  wages  and  prices  are  higher  than  they  should  be  to  cor- 
respond to  the  monetary  flow.  Were  there  any  power  which 
could  by  its  own  fiat  diminish  all  prices  ten  per  cent,  that  act 
would  operate  exactly  like  taking  the  load  off  a  wheel  when 
the  driving  force  became  insufficient  to  turn  it.  The  wheel 
would  immediately  commence  turning  again. 

In  order  that  such  a  fiat  should  be  effective  it  would  have  to 
include  not  only  a  scaling  down  of  prices  and  wages,  but  of 
debts.  The  payment  of  a  debt  is  an  integral  portion  of  the 
monetary  flow ;  but  it  is  a  portion  which  cannot  be  diminished 
in  response  to  a  general  diminution  in  the  flow,  except  through 
the  disaster  of  bankruptcy  on  the  part  of  the  debtor.  The  re- 
sult is  that  when  the  general  flow  of  currency  diminishes,  the 
intensity  of  its  effect  is  exaggerated,  not  only  because  there  are" 
such  large  classes  of  men  who  cannot  command  the  same  prices 
as  before,  but  because  in  every  mercantile  community  large 
payments  of  debts  are  always  due.  This  is  why  a  commercial 
panic  is  first  felt  at  the  monetary  centres,  where  business  is 
conducted  and  debts  are  incurred  on  a  large  scale,  and  why  in 
case  of  such  a  panic  the  obstruction  to  current  business  is  pro- 
portionally greater  than  the  diminution  of  the  total  monetary 
flow. 


386  TI1E  SOCIETARY  CIRCULATION.  [IV.  40. 

4O.  Since  there  is  no  power  which  can  possibly  issue  or  en- 
force such  a  fiat,  or  make  any  regulations  respecting  prices,  it 
follows  that  the  only  available  way  of  avoiding  the  evils  just 
described  would  be  to  make  the  monetary  flow  correspond  to 
the  variations  of  price.  Were  this  practicable,  the  method  of 
doing  it  would  belong  to  a  separate  portion  of  the  present  work, 
since  it  would  be  a  practical  application  of  economical  princi- 
ples, and  not  a  branch  of  the  science.  But  we  may  dispose  of 
the  subject  by  showing  what  kind  of  difficulties  surround  it. 
What  we  want  is  an  accordance  between  the  two  quantities, 
scale  of  prices  and  flow  of  currency.  Now  suppose  that  the 
government  or  banks  of  the  country  could,  by  the  issue  of 
credits  or  paper  money,  make  the  flow  of  currency  what  it 
pleased.  If  prices  were  fixed  by  law,  there  would  then  be  no 
difficulty  in  keeping  up  the  equation.  But,  as  a  matter  of  fact, 
every  man  is  at  liberty  to  set  what  price  he  pleases  on  his 
goods  and  services.  It  would  therefore  be  impossible  for  the 
government  to  keep  up  the  equality.  The  result  of  an  at- 
tempt to  do  so  would  be  a  continuous  increase  in  the  volume 
of  the  currency  to  correspond  to  the  continually  increasing 
prices  which  everybody  would  be  putting  upon  their  contribu- 
tions to  the  industrial  flow. 

In  this  connection  it  must  be  remarked  that  we  have  in 
all  the  preceding  discussions  supposed  the  disturbance  to  begin 
•with  a  diminution  of  the  monetary  flow.  But  the  student 
of  the  subject  should  never  forget  that  the  real  evil  is  not 
merely  this  diminution  of  the  flow,  but  the  lack  of  corre- 
spondence between  the  flow  and  the  scale  of  prices  which  thus 
arises.  The  very  same  trouble  will  arise  if  prices  are  made 
higher  while  the  flow  remains  unaltered.  Now,  efforts  to  in- 
crease prices  or  wages  are  constantly  being  made  on  every 
hand,  and  no  power  can  prevent  them.  Let  us  suppose  all  the 
operations  of  industry  to  be  going  on  in  the  normal  way  already 
described,  everybody  being  employed  on  terms  which  are  satis- 
factory for  the  time  being.  As  human  nature  is,  we  may  be 
sure  that  this  satisfaction  will  not  continue.  Some  class  of  men, 


IV.  40.]  DIMINUTION  IN  THE  FLOW  OF  THE  CURRENCY.   387 

the  builders  of  houses  for  example,  will  be  sure  to  demand 
higher  wages.  Let  us  suppose  that  they  command  them ;  the 
result  will  be  an  increase  in  the  flow  of  the  currency  to  the 
builders  of  houses  which  must  come  out  of  the  pockets  of  their 
employers.  Hence  there  will  be  a  less  flow  from  these  em- 
ployers to  other  people.  The  success  of  the  house-builders 
will  encourage  other  classes  of  laborers  to  demand  higher 
wages.  This  demand  will  come  at  the  very  moment  when,  in 
consequence  of  the  success  of  the  house-builders,  there  will  be 
an  inability  on  the  part  of  the  public  to  pay  even  the  same 
wages  as  before.  The  probable  result  will  be  a  more  or  less 
prolonged  strike,  which,  even  if  it  succeeds,  will  lead  to  some 
classes  being  left  out  of  employment.  That  is,  we  shall  have 
the  very  same  effects  as  would  have  resulted  from  a  with- 
drawal of  currency. 


THE  SOCIKTA11Y  CIRCULATION.  [IV.  41. 


CHAPTER  VIII. 

EFFECT   OF   LABOR-SAVING   IMPROVEMENTS   IN   PRODUCTION. 

41.  EVERY  person  familiar  with  industrial  operations  is 
aware  of  the  contests  which  so  often  arise  between  artisans  and 
the  introducers  of  labor-saving  processes.  These  contests  are 
being  continually  waged  in  one  shape  or  another.  The  general 
rule  is  that  whenever  a  machine  is  introduced  for  making  what 
was  before  made  by  hand,  the  workman  opposes  its  introduction 
by  every  means  in  his  power.  The  opposition  is  based  on  the 
very  obvious  ground  that  if  the  introduction  of  the  machine  is 
permitted,  it  will  deprive  a  part  or  the  whole  of  the  workmen 
of  their  employment.  For  example,  the  number  of  boots  and 
shoes  which  the  people  of  a  country  wear  will  not  be  greatly 
increased  by  a  reduction  in  their  price.  Consequently,  if  a 
machine  is  introduced  which,  under  the  guidance  of  one  man, 
will  do  the  work  of  twenty  shoemakers,  a  falling  off  in  the  de- 
mand for  the  labor  of  shoemakers  is  inevitable. 

The  history  of  this  subject  shows  one  feature  which  does  not 
receive  the  attention  it  deserves.  In  this  contest  between  the 
artisan  and  the  machine,  the  latter  has  been  continually  victo- 
rious for  a  hundred  years.  Class  after  class  of  men  have  seen 
a  large  part  of  their  employment  taken  from  them  by  ma- 
chinery, so  that  at  the  present  time  there  is  scarcely  any  de- 
mand for  the  labor  which  millions  of  men  had  to  perform  a 
century  ago.  And  yet,  in  spite  of  this,  the  laborer  gets  higher 
wages  than  he  did  a  century  ago,  and  is  as  fully  employed  as  he 
ever  was.  His  victor,  instead  of  crushing  him,  has  benefited 
him.  In  the  whole  history  of  the  contest  we  do  not  find  a  case 
of  a  general  and  permanent  fall  of  wages  from  the  introduc- 
tion of  machinery. 


IV.  41.]    EFFECT  OF  LABOR-SAVING  IMPROVEMENTS.        389 

The  principles  laid  down  in  the  preceding  chapters  enable 
us  readily  to  account  for  this.  Let  us  take  for  example  the 
hypothetical  case  of  a  shoe-machine.  Suppose  a  machine  to  be 
so  perfect  that  it  really  makes  shoes  of  every  kind  and  quality 
for  almost  nothing,  so  that  after  its  introduction  there  is  abso- 
lutely no  demand  for  the  labor  of  the  shoemaker.  To  fix  the 
ideas,  let  us  suppose  that  the  average  flow  from  the  rest  of  the 
community  to  the  shoemakers  is  $5  from  each  person.  Let  us 
also  suppose,  to  make  the  case  as  extreme  as  possible,  that  the 
cost  of  the  machine-work  is  practically  nothing,  so  that  every 
man's  shoes  on  the  average  cost  him  $5  less  per  year.  What 
is  the  consequence  ?  An  obvious  consequence  is  that  there  is 
no  longer  any  demand  for  the  labor  of  shoemakers.  A  conse- 
quence less  obvious  is  that  every  man  has  $5  more  to  expend 
in  some  other  direction.  As  already  shown,  he  can  only  expend 
this  $5  by  directly  or  indirectly  demanding  that  amount  of 
labor  or  its  products.  Hence  arises  an  increase  in  the  demand 
for  other  kinds  of  labor  exactly  equal  to  the  diminution  in  the 
demand  for  shoemakers.  The  equilibrium  is  completely  re- 
stored by  the  class  of  men  who  are  engaged  in  making  shoes 
employing  themselves  in  the  kind  of  labor  for  which  there  is 
an  increased  demand.  When  this  change  is  completed  every 
one  will  be  as  fully  employed  as  before,  and  every  one  will 
enjoy  the  advantage  of  cheaper  shoes. 

We  may  readily  apply  the  principle  here  illustrated  to  the 
actual  historical  facts.  The  introduction  of  machinery  during 
the  last  hundred  years  has  to  a  certain  extent  changed  the  di- 
rection of  men's  occupations.  Instead  of  making  things  with 
their  own  hands,  as  they  formerly  had  to  do,  they  are  now 
managing  machines  or  assisting  in  various  ways  in  working  them. 
The  pin-makers  are  no  longer  at  work ;  a  few  of  them  are  feed- 
ing a  pin-making  machine,  but  the  majority  have  learned  other 
employments.  A  large  class  of  carpenters  no  longer  push  the 
plane ;  a  portion  of  them  feed  the  planing-machine,  and  the 
remainder  are  fully  occupied  in  executing  work  with  that  in- 
creased refinement  which  increased  demand  has  encouraged. 


300  TUB  SOCIETART  CIRCULATION.  [IV.  42. 

The  same  change  may  be  traced  all  through  the  channels  of 
industry.     The  general  rule  which  we  may  lay  down  is  this  : 

2fo  operation  of  cheapening  production  can  cause  a  dimi- 
nution in  the  sum  total  of  the  demand  for  labor.  Every  dimi- 
nution which  it  may  cause  in  one  direction  is  compensated  Try 
an  increased  demand  in  some  other  direction. 

42.  Effect  of  Improvements  in  Production  upon  Different 
Classes.  In  the  preceding  discussion  we  have  been  principally 
concerned  with  sums  total  as  affecting  the  prosperity  of  men 
in  general,  but  we  have  not  considered  the  effects  of  improve- 
ments in  production  upon  special  classes.  Our  general  conclu- 
sion has  been  that,  taking  society  at  large,  there  has  been  a 
general  improvement  in  the  ability  of  men  to  command  the 
necessaries  and  luxuries  of  life  with  a  given  amount  of  labor. 
We  have  also  shown  that  the  demand  for  labor  in  general  can- 
not be  said  to  vary  from  generation  to  generation,  because  it 
adapts  itself  to  the  varying  conditions  which  come  into  play 
from  time  to  time.  When  the  flow  of  currency  increases,  the 
demand  for  labor  increases.  Higher  wages  then  can  and  will 
be  commanded ;  but  with  these  higher  wages  come  higher 
prices,  so  that  if  the  conditions  of  production  are  unchanged, 
the  power  on  the  part  of  the  laborer  to  command  the  necessa- 
ries of  life  is  unchanged.  When  we  measure  demand,  not  by 
money,  but  by  commodities,  then  improvements  in  production 
give  rise  to  increased  demand,  which  is  met  by  wages  becoming 
higher  when  measured  by  the  necessaries  of  life,  though  they 
may  not  be  higher  in  money. 

Thus  each  class  of  men  is  affected  by  changes  in  production 
in  two  ways — (1)  by  changes  in  its  money  wages,  and  (2)  by 
changes  in  the  price  of  the  sustenance  which  it  consumes. 

The  question  which  now  arises  is  this :  From  the  fact  that 
the  demand  by  the  community  at  large  for  labor  in  general  re- 
mains unaltered  through  all  variations  in  production,  does  it 
follow  that  the  benefit  of  these  improvements  extends  to  all 
classes?  Does  it  follow  that  the  shoemakers  just  spoken  of 


IV.  43.]    EFFECT  OF  LABOR-SAVING  IMPROVEMENTS.        391 

can  do  what  the  savers  of  money  want  done?  We  reply  that  it 
does  not  so  follow  by  virtue  of  any  general  or  necessary  princi- 
ple. To  get  the  advantage  of  improvements  in  production  the 
laborer  may  have  to  accommodate  himself  to  new  conditions, 
and  if  he  cannot  do  this  he  may  be  as  badly  off  as  before,  if 
not  worse.  The  question  whether  he  can  so  accommodate  him- 
self is  one  of  mere  fact  to  be  settled,  not  by  deductive  reason- 
ing, but  by  an  appeal  to  the  history  of  economic  phenomena, 
and  by  an  examination  of  the  ways  in  which  the  laborer  must 
accommodate  himself  to  the  new  conditions.  What  we  can  say 
with  certainty  is  that,  the  total  demand  for  labor  being  unal- 
tered, it  follows  that  if  there  is  a  less  demand  for  one  kind  of 
labor,  there  will  be  a  greater  demand  for  some  other  kind,  and 
vice  versa.  Hence,  if  the  laborers  of  any  one  class  do  not  reap 
any  benefit,  there  is  so  much  the  greater  benefit  to  be  reaped 
by  those  of  some  other  class.  This  brings  us  to  the  main  ques- 
tion ;  that  is,  the  power  of  laborers  to  pass  from  one  kind  of 
work  to  another.  To  consider  this  question  intelligently  the 
reader  must  have  clearly  in  mind  the  conditions  of  this  trans- 
fer of  labor  between  competing  and  non-competing  groups,  as 
already  developed  (II.  50). 

43.  Let  us  begin  with  the  case  of  shoemakers.  Suppose  that 
by  means  of  machinery  the  amount  of  labor  necessary  to  the 
production  of  a  pair  of  boots  or  shoes  is  suddenly  reduced  to 
one  half.  If  the  community  wear  no  more  shoes  than  before, 
then  one  half  of  the  shoemakers  must  find  some  new  employ- 
ment. We  have  already  shown  that  in  such  a  case  people  who 
wear  boots  and  shoes  will  have  the  amount  of  money  saved  by 
the  improvement  to  spend  for  other  commodities ;  and  if  the 
shoemakers  who  are  thrown  out  of  employment  can  make 
these  commodities,  then  they  will  command  the  same  wages  as 
before,  and  will,  in  common  with  the  rest  of  the  community, 
reap  the  advantage  of  having  cheaper  shoes.  But  if  they  can 
do  absolutely  nothing  but  make  shoes,  they  would  be  com- 
pelled to  suffer  distress. 


THE  SOCIKTARY  CIRCULATION.  [IV.  48. 

To  see  whether  any  such  state  of  things  is  probable,  we  re- 
call that  the  supposition  we  have  made,  namely,  a  sudden 
reduction  of  one  half  in  the  cost  of  making  shoes,  is  an  extreme 
one.  As  a  general  rule  the  improvement  is  gradual,  and  the 
transfer  of  labor  from  shoemaking  to  other  branches  is  brought 
about,  not  by  men  changing  their  employment  under  compul- 
sion, but  by  people  who  under  the  old  system  would  have 
learned  to  make  shoes  learning  to  do  something  else  on  the 
new  system.  The  distress  therefore  could  arise  in  the  way  we 
have  pointed  out  only  by  a  class  of  men  being  born  who  could 
never  learn  to  do  anything  but  make  shoes.  As  a  matter  of 
fact  no  such  men  are  ever  born.  There  are  a  large  number  of 
mechanical  trades  requiring  the  same  order  of  natural  skill  as 
making  shoes,  which  men  who  would  otherwise  become  shoe- 
makers can  readily  learn. 

The  question  then  takes  the  form  whether  the  members  of 
the  community  would  spend  the  money  saved  in  their  shoes  in 
the  demand  for  products  requiring  the  same  skill  as  shoemak- 
ing. Let  us  for  clearness  suppose  the  community  divided  into 
three  classes,  unskilled  laborers,  skilled  laborers,  and  intellectual 
laborers.  Let  us  also  suppose  that  every  man  who  is  born  can 
find  a  place  in  one  of  these  classes,  and  in  only  one.  We  also 
suppose  that  in  each  class  he  can  learn  to  follow  any  pursuit 
which  he  may  select.  Then  if  the  community  spends  the 
money  saved  on  shoes  in  demanding  products  of  unskilled  la- 
bor, the  class  of  unskilled  laborers  will  be  the  people  most 
benefited,  because  they  will  have  higher  wages  and  cheaper 
shoes  at  the  same  time.  The  class  of  skilled  laborers  would 
gain  by  having  cheaper  shoes,  but  lose  by  having  lower  wages. 
We  cannot  say  whether  the  advantage  or  disdvantage  would  be 
the  greater  in  this  case.  The  demand  for  intellectual  labor  would 
not  be  altered  ;  but  the  educated  class  also  would  gain  by  having 
cheaper  shoes.  The  general  result  would  be  that  unskilled  labor 
would  gain  doubly ;  intellectual  labor  would  gain  singly ;  skilled 
labor  might  either  gain  or  lose.  The  average  result  to  the  com- 
munity at  large  would  be  a  gain  equal  to  the  saving  on  shoes. 


IV.  44.]    EFFECT  OF  LABOR-SAVING  IMPROVEMENTS.        393 

If  the  money  saved  on  shoes  was  expended  in  the  products 
of  other  skilled  labor  of  the  same  order  as  shoemaking,  then 
the  balance  would  be  completely  preserved,  and  all  classes 
would  command  the  same  wages  as  before,  but  would  gain  by 
having  cheaper  shoes.  Finally,  if  the  increased  demand  was  in 
the  direction  of  intellectual  labor,  the  result  would  be  of  the 
same  general  nature  as  when  the  demand  was  for  unskilled  la^ 
bor.  Intellectual  laborers  would  gain  doubly  by  having  higher 
wages  and  getting  cheaper  shoes;  unskilled  laborers  would 
gain  singly  by  having  cheaper  shoes  with  the  same  wages; 
while  the  class  of  skilled  laborers  would  gain  in  one  direction 
and  lose  in  another. 

44.  The  question  whether  all  classes  are  equally  benefited 
therefore  turns  upon  whether,  when  machinery,  knowledge, 
and  methods  of  production  are  improved,  the  general  order 
of  skill  required  in  production  is  increased  or  diminished. 
This,  I  say,  is  the  form  which  the  historical  question  takes.  It 
is  one  to  be  answered  by  a  comprehensive  examination  of  the 
requirements  of  modern  machinery  and  labor.  The  result 
would  probably  be  that  a  lower  order  of  some  qualities  and  a 
higher  order  of  others  is  required.  It  is  probable  that  less 
natural  skill  of  a  rare  kind  is  required  when  goods  are  made 
by  machinery.  So  far  as  this  is  true,  the  introduction  of 
machinery  is  doubly  beneficial  to  the  day-laborer  by  securing 
him  a  higher  order  of  employment  and  cheaper  necessaries  of 
life  at  the  same  time.  It  is  also  true  that  the  management  of 
the  machine  may  require  moral  characteristics — industry,  sobri- 
ety, steadiness,  honesty,  and  reliability — of  a  higher  degree  than 
ordinary  irresponsible  labor.  If  so,  the  laborer  who  does  not 
possess  these  qualities  would  again  be  at  a  relative  disadvantage 
in  consequence  of  improvements  in  production.  That  is  to 
say,  he  would  lose  by  lower  wages  and  gain  by  cheaper  pro- 
ducts, and  the  loss  might  exceed  the  gain.  We  may  lay  it 
down  as  a  general  rule  that  the  idle,  dissipated,  and  unreliable 
classes  will  be  in  about  the  same  low  state,  no  matter  how 


THE  SOCIETAK7  CIRCULATION.  [IV.  45. 

far  society  advances.  Even  philanthropists  could  do  nothing 
for  them,  unless  it  could  do  away  with  them  in  the  future  by 
preventing  them  from  being  born ;  and  perhaps  there  is  no 
effective  way  of  doing  this  unless  by  extermination. 

45.  There  is  yet  another  way  of  looking  at  the  subject 
which  will  lead  us  to  similar  general  conclusions.  The  way  in 
which  improvements  really  benefit  society  is  by  increasing  the 
quantity  and  quality  of  the  commodities  necessary  to  existence, 
health,  comfort,  and  happiness.  But  when  we  consider  the 
relations  of  special  classes  of  men  we  find  that  different  classes 
consume  different  commodities.  Improvement  in  the  produc- 
tion of  silk  dresses,  linen  shirts,  white  neckties,  gold  watches, 
and  fine  houses  are  of  no  benefit  to  the  class  of  unskilled 
laborers,  who  cannot  command  or  do  not  want  any  of  these 
commodities,  even  when  they  are  cheapest.  What  is  neces- 
sary to  the  amelioration  of  this  class  is  improvement  in 
the  production  of  corn,  pork,  coarse  cloth,  flannel,  and  cheap 
houses.  "We  may  then  inquire  whether  the  production  of  this 
last  class  of  commodities  has  improved  as  much  as  that  of  the 
other  and  higher  classes.  If  so,  then  all  classes  will  be  bene- 
fited in  the  same  proportion.  If  the  improvement  in  produc- 
ing the  necessaries  of  life  exceeds  that  in  producing  the  luxu- 
ries, the  laboring  classes  will  have  been  the  greatest  gainers. 
In  the  contrary  case  the  higher  classes  will  have  been  the  gain- 
ers. This,  again,  leads  us  to  considerations  of  fact  which  the 
reader  can  advantageously  enter  upon  for  himself. 

There  is,  however,  one  defect  in  his  conclusions  to  be  guard- 
eda  gainst.  If  we  inquire  into  the  effect  of  improvements 
in  production  upon  human  progress,  we  should  make  a  great 
mistake  if  we  did  nothing  more  than  compare  class  with  class 
in  the  way  we  have  followed  in  the  preceding  examples.  One 
of  the  great  fallacies  which  pervade  popular  economic  reason- 
ing arises  from  failing  to  distinguish  between  small  classes  and 
large  ones.  We  hold  up  for  public  sympathy  a  few  individual 
sufferers  whom  we  suppose  to  have  suffered  in  consequence 


IV.  45.]    EFFECT  OF  LABOR-SAVING  IMPROVEMENTS.        395 

of  the  advance  of  society,  and  we  ask  society  at  large  to  stop 
its  progress  for  the  benefit  of  the  unfortunate  class  supposed 
to  be  represented  by  these  sufferers,  without  calculating  the 
number  of  this  class.  We  must  admit  that,  as  men  are  consti- 
tuted, they  will  be  moved  more  strongly  to  action  by  individ- 
ual cases  which  chance  to  be  presented  to  them  than  by 
considerations  of  the  good  of  a  large  class  which  they  do 
not  see.  They  forget,  or  will  not  comprehend,  that  the  inter- 
ests of  millions  are  more  important  than  the  interests  of  thou- 
sands represented  by  some  particular  petitioner  or  sufferer 
whose  case  has  excited  their  sympathies.  This  leads  us  to  see 
that  in  considering  the  subject  from  a  philanthropic  point  of 
view,  the  beneficent  effect  of  improvements  in  production  con- 
sists in  this,  that  whole  classes  of  men  are  enabled  to  enjoy 
more  of  the  luxuries  of  life.  Fifty  years  ago  the  majority 
of  the  inhabitants  of  this  country  slept  on  straw  beds ;  now 
every  inhabitant  who  wants  to  can  command  as  good  a  bed  as 
the  richest  man  in  the  country,  so  far  as  its  substantial  qualities 
are  concerned.  We  now  see  in  the  cottages  of  every  class  of 
laborers  little  comforts  which  fifty  years  ago  could  be  com- 
manded only  by  the  wealthy.  In  a  word,  the  number  of  those 
who  can  enjoy  the  substantial  comforts  of  life  is  continually 
increasing  through  improvements  in  production,  no  matter 
what  doubt  may  be  entertained  as  to  the  status  of  the  low- 
est classes  of  humanity. 

It  appears  that  the  general  effect  of  the  improvements  in 
question  is  to  leave  the  two  extreme  classes,  the  wealthy  and 
the  worthless,  comparatively  unchanged.  The  former  can  com- 
mand all  they  want  whether  improvements  go  on  or  not.  They 
do  indeed  gain  by  the  discovery  of  new  means  of  enjoyment, 
but  this  is  not  a  merely  economic  effect,  being  due  to  improve- 
ments in  knowledge,  taste,  and  morals.  The  worthless  class  will 
always  be  what  it  is  now,  no  matter  what  society  tries  to  do  for 
it.  But  all  classes  between  these  extremes  are  constantly  ad- 
vancing, and  the  luxuries  of  life  are  becoming  accessible  to  a 
continually  increasing  proportion  of  the  population. 


396  THE  SOCIETARY  CIRCULATION.  [IV.  4C. 


CHAPTER  IX. 

THE   FUNCTIONS   OF   THE   CAPITALIST. 

46.  THERE  remains  to  be  considered  the  effect  of  investing 
money  in  the  increase  of  capital.  In  the  popular  mind,  one 
who  invests  his  money  is  supposed  not  to  expend  it.  Hence  it 
might  be  supposed  that  the  effect  of  the  investment  of  money 
would  be  that  described  in  Chapter  VII.,  through  the  money 
being  withdrawn  from  circulation.  But  we  now  know  this 

O 

opinion  to  be  erroneous.  Investing  money  consists  in  transfer- 
ring its  ownership  to  some  other  person,  and  receiving  in  return 
a  right  of  property  in  capital  of  some  kind.  This  will  be  already 
clear  to  the  student  who  has  carefully  studied  the  chapter  on 
capital  in  the  second  book.  The  person  investing  is  simply  a 
purchaser  of  bonds,  stocks,  or  material  capital ;  and  if  he  buys 
bonds  or  stocks,  he  becomes  the  owner  of  certain  rights  in  some 
form  of  material  capital. 

Although  there  may  be  many  transfers  of  the  money  thus 
invested  before  it  finally  reaches  the  Ifands  of  laborers,  yet  it 
will  as  a  rule  ultimately  reach  them.  Suppose,  for  example, 
that  a  person  A  loans  a  sum  of  money  x  to  a  friend.  Then  the 
friend  has  x  dollars  more  and  A  has  x  dollars  less  than  before, 
so  that  the  sum  total  of  their  power  to  employ  labor  remains 
unchanged.  Let  the  friend  purchase  bonds  from  a  banker 
with  the  money.  Then  the  power  of  employing  x  dollars' 
worth  of  labor  passes  to  the  banker.  The  money  serves  the 
banker  no  useful  purpose  until  he  passes  it  to  some  one  else, 
perhaps  a  customer.  Every  one  into  whose  hands  it  falls  must 
be  paying  or  losing  interest  on  it  while  he  keeps  it,  and  he  can- 
not gain  the  interest  until  he  purchases  an  ownership  in  some 
form  of  actual  capital. 

As  a  general  rule  it  will  not  pass  through  many  hands  until 


IV.  47.]         THE  FUNCTIONS  OF  THE  CAPITALIST.  397 

it  is  employed  in  hiring  laborers  to  build  a  house  or  factory, 
or  to  do  some  other  kind  of  work  necessary  to  the  increase  of 
capital.  Hence,  so  far  as  the  employment  of  labor  is  concerned, 
expenditure  by  investment  gives  the  same  kind  of  employ- 
ment as  any  other  kind  of  expenditure,  and  thus  forms  no 
exception  to  the  rule  laid  down.  But  if  we  consider  the 
ulterior  effects  of  this  mode  of  expenditure  as  compared  with 
that  of  purchasing  commodities  for  one's  own  consumption,  we 
shall  find  that,  although  the  immediate  effect  is  the  same,  the 
ultimate  effect  upon  the  prosperity  of  society  is.  very  different 
The  effects  may  in  fact  be  divided  into  primary  and  secondaiy. 
The  primary  effect  is  that  already  pointed  out  in  showing  that 
the  expenditure  does  not  increase  or  dimmish  the  sum  total  of 
the  demand  for  labor,  but  only  determines  into  which  one  of  a 
great  number  of  possible  directions  the  labor  shall  be  directed. 
The  secondary  effect  is  to  increase  and  cheapen  the  production 
of  sustenance,  and  thus  to  diminish  its  cost  to  the  community 
and  to  laborers  in  general.  This  secondary  effect  is  produced 
in  so  indirect  a  manner  that  we  must  view  the  process  through 
which  it  arises  from  different  points  of  view. 

47.  We  begin  with  an  example  of  a  special  case  wfiich  will 
illustrate  the  theory.  Let  us  suppose  that  a  person,  by  living  in 
the  most  economical  manner  possible,  could  save  $3000  per  an- 
num out  of  his  income.  He  then  has  his  choice  of  two  modes  of 
proceeding: 

Firstly,  not  desiring  to  live  so  frugally,  he  spends  his  whole 
income  in  sustenance  for  himself.  That  is  instead  of  living 
frugally,  he  demands  fine  furniture  and  carpets  for  his  house, 
books  for  his  library,  pictures,  jewelry,  extra  fine  clothing, 
horses  and  carriages  for  himself,  to  the  total  amount  of  $3000 
per  annum. 

Secondly,  he  may  abstain  from  the  enjoyment  of  these  lux- 
uries and  expend  the  income  thus  saved  in  building  houses  for 
rent. 

In  changing  from  the  former  mode  of  expenditure  to  the 


398  THE  80CIETART  CIRCULATION.  [IV.  47. 

latter  he  will,  as  already  shown,  be  diverting  a  certain  amount 
of  the  producing  power  of  the  country  from  the  work  of 
producing  furniture,  books,  clothing,  horses  and  carriages  for 
him  to  the  work  of  building  houses  for  him.  So  far  the 
account  is  balanced,  and  the  change  is  neither  better  nor  worse 
for  society  at  large.  It  is  the  same  if,  after  each  house  is  built, 
he  occupies  it  with  his  own  family,  or  uses  it  in  any  way  for 
his  own  exclusive  benefit.  The  only  change  is  that  society  is 
supplying  him  with  houses  for  his  own  use  instead  of  supplying 
him  with  the  luxuries  already  described. 

But  suppose  that  after  each  house  is  built  he  regards  it  as  an 
investment  of  capital  and  offers  it  for  rent.  Then  the  condi- 
tions are  altered.  Society  at  large,  or  the  particular  class  of 
society  which  can  afford  to  live  in  the  kind  of  a  house  he  has 
built,  will  have  a  larger  supply  of  houses  at  its  disposal.  The 
tenants  will  each  be  in  the  enjoyment  of  a  house  which  they 
could  not  afford  to  build.  Leaving  out  of  account  the  rent  they 
pay,  the  state  of  things  is  the  same  as  if  the  saver  had  vol- 
untarily abstained  from  luxuries  in  order  that  these  tenants 
might  have  houses. 

Sincej  however,  the  tenants  pay  rent  at  the  highest  market 
rate,  the  question  may  arise  whether  this  rent  is  not  in  every 
way  an  equivalent  for  the  benefit  rendered  by  the  house,  so 
that  after  all  society  at  large  is  no  better  off  on  account  of  the 
second  mode  of  expenditure.  The  reply  should  be  in  the 
negative.  Society  is  better  off  because  of  the  additional  supply 
of  houses  and  the  consequent  lowering  of  rents.  Although  the 
market  value  of  the  services  rendered  and  received  balance  each 
other,  yet  the  total  utilities  do  not  balance.  Each  tenant  enjoys 
a  complete  house  without'  having  had  to  save  anything  to  build 
it.  Could  they  have  had  no  house  until  they  had  built  them 
themselves,  they  would  have  been  obliged  to  go  for  several 
years  almost  without  shelter. 

Suppose  that  the  man,  being  of  a  penurious  disposition, 
expends  all  the  rent  he  receives  from  his  house  in  building 
still  more  houses.  It  is  clear  that  so  long  as  that  process  con- 


IV.  48.]         THE  FUNCTIONS  OF  THE  CAPITALIST.  399 

tinues  the  advantage  to  the  tenants  continually  increases. 
They  all  have  to  pay  rent,  but  that  rent  is  expended  in  build- 
ing new  houses  for  more  tenants ;  and  so  long  as  the  owner 
himself  abstains  from  any  enjoyment  of  the  income,  so  long  do 
tenants  get  the  entire  benefit  both  of  the  houses  and  of  the 
rents. 

Let  us  inquire  more  closely  into  the  exact  nature  of  the 
benefit  which  this  investor  in  houses  has  conferred.  It  is 
plain  that,  whatever  the  number  of  houses  he  has  built  by  his 
saving,  that  additional  number  have  the  tenants  of  the  country 
to  live  in.  The  supply  being  thus  enlarged,  it  is  to  be  ex- 
pected that  the  rents  will  be  lower  in  about  the  same  propor- 
tion, so  that  the  entire  body  of  tenants  get  more  houses  for 
the  same  sum  total  of  rent.  That  is,  the  competition  of  land- 
lords lowers  rents  just  as  an  increased  supply  of  a  commodity 
lowers  its  price. 

But  there  is  one  essential  difference  between  this  com- 
petition and  that  in  the  manufacture  and  sale  of  commodities. 
In  the  latter  case  there  is  a  certain  net  cost  of  production 
below  which  no  amount  of  competition  can  permanently  de- 
press the  price.  But  what  the  tenant  pays  rent  for  is  only  the 
use  of  the  house,  not  its  ownership,  and  the  owner  makes  this 
use  available  to  him  through  abstinence,  which  does  not  cost 
money  at  all.  Now,  there  is  no  necessary  limit  to  the  possible 
practice  of  abstinence,  and  so  no  necessary  limit  to  a  possible 
fall  of  house-rents  through  the  competition  of  capitalists. 

48.  To  consider  the  subject  in  a  more  general  way,  let  us 
suppose  that  nobody  saved  any  money  for  investment,  but  that 
every  person  in  the  community  expended  his  entire  income  in 
providing  for  the  immediate  wants  of  himself  and  his  family. 
Then  there  could  be  no  increase  in  the  capital  of  the  coun- 
try. For  example,  no  railway  can  be  built  unless  certain  per- 
sons feed  the  laborers  who  are  engaged  in  building  it;  and  in 
order  to  do  this  it  is  absolutely  necessary  that  some  one  should 
have  saved  up  money  or  sustenance  which  he  does  not  want 


400  THE  SOCIETAR7  CIRCULATION.  [TV.  48. 

himself.  This  would  not  cause  any  positive  loss  in  a  commu- 
nity which  did  not  increase  in  population,  and  which  was  con- 
tent to  remain  stationary  in  its  consumption  of  commodities. 
That  is  to  say,  if  all  the  railways,  farms,  factories,  fences,  and 
other  forms  of  capital,  and  the  whole  supply  of  raw  material 
employed  in  production,  are  kept  up  to  their  present  standard, 
while  population  remains  the  same,  the  wants  of  the  stationary 
population  will  continue  to  be  supplied  as  well  as  ever,  but  no 
better. 

If,  however,  the  owner  of  a  railway  should  allow  the  rails  to 
rust  out  without  having  saved  the  funds  to  replace  them,  and  if 
the  same  thing  should  happen  to  the  other  fixed  capital  of  the 
country,  there  would  be  a  positive  diminution  of  capital  with- 
out, apparently,  any  one  ceasing  to  live  on  his  income.  But  this 
would  amount  to  the  same  thing  as  expending  not  only  one's 
current  income,  but  also  the  capital  he  had  before  accumulated. 
In  order  to  keep  up  his  capital  the  owner  must  save  enough 
from  his  income  to  make  good  its  wear  and  tear.  If  he  does 
this  and  nothing  more,  he  will  still  be  expending  his  entire 
income. 

Suppose  that  under  these  circumstances  population  increases. 
Without  any  new  railways,  factories,  fences,  and  farms  there 
can  be  no  increase  in  the  production  of  commodities ;  or,  at 
least,  the  increase  will  not  be  proportional  to  that  of  the  labor 
which  would  now  be  available.  The  result  would  be  a  general 
scarcity  and  higher  prices.  Men  would  be  compelled  to  seek 
out  new  farms;  but  since,  by  hypothesis,  no  one  has  any 
money  to  loan  them,  they  must  supply  their  own  wants  as  best 
they  can  while  cultivating  the  farms.  Since  no  new  railways 
are  built,  the  farther  they  go  from  the  railways  the  farther 
they  will  have  to  haul  their  produce  to  market.  Since  no  more 
clothing  can  be  made,  every  one  would  have  to  go  with  a  con- 
tinually diminishing  amount  of  clothes.  The  result  would  be 
scarcity,  distress,  and  perhaps  famine,  continually  increasing 
from  year  to  year. 

Of  course  the  same  result  would  happen  yet  more  rapidly  if 


IV.  49.]         THE.  FUNCTIONS  OF  THE  CAPITALIST.  401 

the  owners  of  capital  not  only  failed  to  add  to  their  savings, 
but  suffered  the  capital  which  they  already  possessed  to  go  to 
decay.  After  the  rails  are  rusted  out  no  more  freight  can  be 
drawn  over  the  road ;  after  the  machinery  is  worn  out  no  more 
goods  can  be  made  until  it  is  replaced. 

Now,  the  fact  is  that  a  large  majority  of  persons  in  every 
community  do  act  in  precisely  this  way.  They  do  not  save 
any  part  of  their  income  to  be  invested  in  capital.  In  fact,  our 
typical  idea  of  a  laborer  is  that  of  one  who  has  never  saved 
anything  from  his  earnings,  while  by  a  capitalist  we  mean  a 
man  who  has  saved  money  from  his  income  and  employed  it  in 
hiring  laborers  to  improve  the  capital  of  the  country.  A  large 
majority  of  laborers,  even  if  they  were  placed  in  possession  of 
capital,  would  probably  employ  it  in  satisfying  their  current 
wants.  Hence  if  there  were  no  capitalists  there  would  be  a 
continual  increase  of  misery,  want,  and  starvation  which  would 
go  on  unceasingly  with  the  increase  of  population. 

49.  The  same  thing  may  be  seen  in  another  light  from  the 
communistic  point  of  view  (Part  II.,  Chapter  IX.).  Referring 
to  the  conception  of  a  national  reservoir  of  wealth,  it  is  evi- 
dent that  the  less  sustenance  any  one  draws  from  this  reservoir 
the  more  will  be  left  for  others.  Now,  a  non-capitalist  is  a  per- 
son who  withdraws  from  the  reservoir  in  the  form  of  suste- 
nance everything  to  which  his  services  entitle  him;  that  is,  his 
whole  income.  The  capitalist  is  one  who  does  not  withdraw 
all  this  sustenance.  He  leaves  in  the  reservoir  that  portion  of 
his  share  to  which  his  investment  would  entitle  him,  and,  in- 
stead of  taking  the  sustenance,  becomes  the  owner  of  capital 
designed  to  increase  the  production  of  sustenance.  Let  us  call 
A  that  part  of  his  income  which  the  capitalist  expends  for 
sustenance,  and  B  that  part  which  he  invests  in  capital,  say 
railway  stock  and  machinery. 

If  he  consumed  this  railway  and  machinery  to  supply  his 
own  wants,  then,  so  far  as  the  interests  of  society  are  con- 
cerned, he  might  as  well  have  taken  the  portion  B  in  suste- 
26 


402  TUB  SOCIKTART  CIRCULATION.  [TV.  49. 

nance  at  once.  But  lie  cannot  consume  any  considerable  part 
of  his  railways,  machinery,  or  other  form  of  capital  in  the  sup- 
ply of  his  own  needs.  The  palace-car  in  which  a  railway  pres- 
ident sometimes  travels  is  indeed  a  product  of  the  capital  of 
the  railway  consumed  as  sustenance.  But  it  is  a  very  small 
fraction  of  the  earnings  of  the  road.  The  great  function  of 
the  road  is  to  produce  sustenance  and  bring  it  to  the  reservoir 
for  use  by  the  public. 

But  the  reader  must  guard  against  a  misunderstanding.  We 
have  apparently  shown  that  the  capitalist  not  only  leaves  his 
share  of  sustenance  for  others  to  consume,  but  also  the  whole 
product  of  his  capital.  But  this  would  be  a  misinterpretation. 
It  is  true  that  if  we  suppose  the  sustenance  which  he  declines 
to  take  to  have  been  previously  brought  into  the  reservoir,  this 
would  be  true  so  far  as  that  particular  fund  of  sustenance  is 
concerned.  But  he  cannot  get  his  capital  without  employing 
labor  to  produce  it.  So  he  says  to  the  laborer,  "  Instead  of 
producing  sustenance  for  me  to  consume,  produce  capital  for 
me  to  use  in  further  production."  Hence,  in  the  very  act  of 
refusing  his  sustenance,  he  withdraws  a  corresponding  amount 
of  labor  from  the  production  of  sustenance  and  devotes  it  to  the 
production  of  railways,  mills,  or  other  forms  of  capital.  Less 
sustenance  and  more  capital  is  produced.  But  do  not  forget 
that  this  diminution  of  sustenance  does  not  come  out  of  the 
share  of  others,  but  is  only  the  capitalist's  own  share  which  he 
has  refused  to  order. 

As  already  shown,  he  cannot  get  any  use  of  his  capital  except 
by  making  sustenance  with  it.  Moreover,  if  his  investment  is 
a  profitable  one,  the  amount  of  sustenance  thus  made  must  be 
greater  than  that  which  he  refused  to  consume.  Since  capital 
is  really  a  labor-saving  contrivance,  we  must  expect  that  this 
will  always  be  the  case  except  when  bad  investments  are  made. 

The  question  may  now  be  asked,  Since  all  this  extra  suste- 
nance which  he  receives  as  profit  belongs  to  him,  in  what  way 
is  society  benefited  ?  The  reply  is  this :  By  hypothesis,  it  is 
sustenance  which,  although  he  owns,  he  does  not  himself  want 


IV.  50.]         THE  FUNCTIONS  OF  THE  CAPITALIST.  403 

to  consume.  If  he  had  wanted  to  consume  it,  he  would  have 
consumed  it  in.  the  first  place  and  never  purchased  his  capital  at 
all.  Since,  then,  he  necessarily  offers  this  increased  supply  of 
sustenance  in  the  public  markets  for  sale,  the  result  is  a  fall  in 
the  price  of  sustenance  generally,  arising  from,  a  more  plenti- 
ful supply  at  the  command  of  the  community.  Thus  we  reach 
the  very  same  result  that  we  did  by  the  former  reasoning  in 
the  case  of  houses,  the  enjoyment  of  houses  being  equivalent 
to  the  consumption  of  sustenance. 

Let  us  observe,  in  illustration  of  all  this,  the  actual  process  as 
we  see  it  going  on.  A  barrel  of  flour  can  now  be  transported 
from  Chicago  to  New  York  for  about  fifty  cents.  Thus  at  an 
insignificant  cost  the  whole  population  of  New  York  can  draw 
their  food  from  the  Western  prairies.  This  would  have  been 
impossible  unless  railways  had  been  built.  The  railways  would 
never  have  been  built  if  the  Yanderbilts  and  other  wealthy 
men  had  not  saved  up  their  income  and  employed  it  in  build- 
ing railways. 

5O.  A  clear  understanding  of  this  intricate  subject  is  so 
important  to  one  desiring  a  complete  command  of  it  that  we 
shall  go  over  it  in  yet  another  way.  From  what  has  been  said 
in  the  preceding  chapters  it  will  be  seen,  that  the  monetary 
flow  to  a  person  whom  we  call  an  agent  is  divisible  into  two 
portions,  the  one  income,  over  the  expenditure  of  which  he 
has  complete  command,  and  the  other  business  expenses,  over 
which  although  formally  he  may  have  equal  command,  yet, 
practically,  which  he  is  obliged  to  expend  in  the  ways  deter- 
mined by  the  condition  of  his  business.  With  this  latter 
portion  we  have  at  present  nothing  to  do,  being  concerned 
only  with  his  expenditure  of  income. 

In  relation  to  his  income  we  may  regard  him  either  as  pro- 
ducer or  consumer.  As  a  producer  his  income  is  the  money 
value  of  his  contributions  to  the  wants  of  others.  These  contri- 
butions may  be  in  the  form  either  of  capital  or  of  sustenance, 
but  they  are  determined  immediately  by  the  demands  of 


404  THE  SOCIETART  CIRCULATION.  [IV.  60. 

othcre  for  his  products,  coupled,  of  course,  with  his  own 
talents.  In  other  words,  if  he  made  shoes  rather  than  clothes, 
it  was  not  because  he  thought  shoes  a  better  thing  to  make 
than  clothes,  but  because  he  found,  or  thought  he  would  find, 
people  wanting  shoes  rather  than  clothes.  In  whatever  branch 
of  business  activity  he  engaged,  we  may  assume  that  he 
chose  it  on  account  of  the  wishes  of  others  rather  than  of  him- 
self. Hence  he  is  not  to  be  considered  responsible  for  the 
direction  of  his  producing  activities. 

But  when  we  consider  him  as  a  consumer  of  commodities 
or  expender  of  income  the  case  is  reversed.  He  holds  in  his 
hands  the  power  of  directing  an  amount  of  industry  represented 
by  his  income.  He  thus  becomes  a  power  determining  what 
he  shall  demand  from  society ;  and  the  question  which  arises 
is  whether  society  has  any  more  interest  in  his  demanding 
one  thing  than  another  (cf.  Chapter  VI.). 

From  what  has  been  said  it  will  be  seen  that  there  are  two 
ways  of  making  this  demand.  The  agent  may  either  purchase 
something  already  made,  or  he  may  hire  laborers  to  make  it. 
But  it  has  already  been  shown  that  these  two  methods  lead 
substantially  to  the  same  result.  It  is  true  that  in  the  first  case 
he  does  not  immediately  direct  any  industry  at  all,  since  all 
he  does  is  to  purchase  from  some  seller,  X,  a  commodity,  C, 
already  made.  But  in  the  very  act  of  paying  for  C  he  places 
in  X's  hands  both  the  power  and  the  disposition  to  reproduce 
C  in  the  future  by  re-employing  labor  if  necessary.  Hence, 
whether  he  purchases  C  or  employs  a  laborer  to  make  C,  he 
directs  a  certain  amount  of  labor  to  that  production  in  the  very 
act  of  expending  his  income. 

The  only  question  which  we  have  left  is  whether  the  com- 
modity C  which  the  agent  demands  is  sustenance  for  himself 
or  capital.  The  capital  may  be  sustenance  for  sale  to  some 
one  else.  If  he  demands  sustenance  for  himself,  then  his  ac- 
count with  society  is  balanced ;  he  simply  consumes  the  equiv- 
alent of  his  income,  that  is,  of  his  contributions  to  the  suste- 
nance or  capital  of  others.  But  if  he  demands  any  form  of 


IV.  51.]         THE  FUNCTIONS  OF  THE  CAPITALIST.  405 

fixed  capital,  then,  until  that  capital  produces  something  for 
some  one  else  to  enjoy,  society  at  large  is  in  exactly  the  same 
condition  as  if  he  had  demanded  sustenance  for  himself.  The 
changed  condition  of  things  arises  when  that  capital  begins  to 
produce  sustenance  which  is  offered  for  sale.  If  we  suppose 
the  agent's  demand  for  capital  to  have  included  everything 
necessary  to  make  the  capital  effective,  which  of  course  we 
must  do,  then  it  would  have  comprised  not  only  fixed  capital, 
but  raw  material  to  be  manufactured,  and  sustenance  for  the 
laborers  employed  in  the  manufacture.  To  make  the  matter 
clear,  we  may  divide  his  investment  into  three  parts  : 

F,  that  part  expended  in  fixed  capital ; 

C,  that  part  expended  in  raw  material  for  manufacture  ; 

W,  that  part  expended  in  the  payment  of  wages. 

Each  of  these  items  represents  a  fund. of  labor  which  he 
could  have  required  to  be  devoted  to  sustenance  for  him- 
self. 

The  portion  "W  represents  that  portion  of  the  fund  of  suste- 
nance which  he  owns  and  commands,  but  the  right  to  which 
he  delivers  over  to  the  laborers  in  exchange  for  other  work. 
Thus  the  laborers  enjoy  a  certain  amount  "W  of  sustenance 
which  would  otherwise  have  been  consumed  by  the  agent. 

The  machinery  now  goes  to  work ;  the  raw  material  is  manu- 
factured into  some  finished  product,  sustenance  or  capital, 
and  the  result  is  that  an  increased  product  is  for  sale  to  society, 
thus  resulting  in  competition  and  a  reduction  of  prices. 

51.  Let  us  now  consider  whether  the  laborer,  that  is,  the 
non-capitalist,  really  has,  through  the  saving  of  the  capitalist, 
an  opportunity  to  consume  a  greater  value  than  he  produces. 
Taking  the  case  just  as  it  stands,  our  answer  must  be  in  the 
negative.  Suppose  the  capitalist  to  have  allowed  the  tenant 
to  live  in  his  house  for  a  whole  year  free  of  rent,  except  such 
amount  as  might  be  necessary  to  keep  the  house  in  its  original 
condition.  Then  when  the  tenant  restored  the  house  to  the 
owner  at  the  end  of  the  year,  it  would  be  in  the  same  condi- 


406  THB  SOCIETART  CIRCULATION.  [IV.  61. 

tion  as  when  be  took  it.  He  would  therefore  have  consumed 
nothing  more  than  lie  reproduced  by  keeping  up  the  repairs. 
Hence  whatever  portion  of  the  rent  he  pays  as  interest  on  the 
capital  invested  is  over  and  above  his  actual  consumption  of 
the  house.  It  might  therefore  seem  that  he  gets  no  equiva- 
lent for  that  portion  of  the  rent  which  he  pays  for  interest  on 
capital. 

This  is  the  same  stumbling-block  that  we  have  already  de- 
scribed in  the  chapter  on  the  rate  of  interest  (Book  II.,  §  Y2). 
It  is  very  evident  that  the  capitalist  has  given  him  during  the 
whole  year  the  use  and  shelter  of  a  house  which  would  never 
have  existed  but  for  the  capitalist's  savings.  Now,  it  is  this 
use  which  measures  the  benefit  conferred,  and  not  the  consump- 
tion of  the  house.  Perhaps  in  thirty  years  the  tenant  could 
have  saved  money  enough  to  build  the  house  himself,  but  he 
must  have  the  house  now ;  and  the  benefit  rendered  consists 
in  the  capitalist  letting  him  have  now  what,  by  his  own  ex- 
ertions, he  would  not  have  had  for  thirty  years.  But  it  still  fol- 
lows that  he  must,  at  the  end  of  his  tenancy,  return  the  house 
in  as  good  order  as  when  he  got  it,  besides  paying  interest  on 
the  capital  invested  in  it. 

Keturning,  then,  to  our  original  question,  we  find  it  to  be 
really  true  that  the  capitalist  does  not  allow  the  laborer  to  con- 
sume more  than  he  produces.  But  we  must  remember  that 
he  produces  more  than  he  would  have  produced  without 
capital.  Capital,  skill,  and  organization  are  the  great  labor- 
saving  agents.  The  more  they  improve  the  more  productive 
labor  becomes.  Now,  the  laws  of  supply  and  demand  permit 
the  laborer  to  command  his  full  share  of  this  improvement 
although  it  was  effected  by  the  mental  powers  of  a  much 
higher  class  of  men. 


EXERCISES.  407 


EXERCISES. 

1.  When  Mr.  George  Peabody  made  his  great  gift  for  the  benefit  of  the 
London  poor,  he  directed  that  it  should  be  expended  in  building  houses  for 
them  and  renting  these  houses  to  them  at  a  moderate  rental.  The  income 
thus  gained  was  to  be  continually  expended  in  building  additional  houses 
for  other  poor. 

1.  By  this  arrangement  did  the  benefactor  confer  as  great  a  benefit  upon 
the  poor  as  if  he  had  directed  that  the  houses  should  be  occupied  free  of 
rent? 

II.  In  what  respect  did  his  action  differ  in  its  effect  from  that  of  a  mi- 
serly capitalist  who  invested  his  whole  surplus  income? 

2.  Explain  the  function  of  capital  and  the  reason  for  interest  from  the 
point  of  view  taken  in  III.  78,  and  show  that  great  numbers  of  people  are 
now  in  the  enjoyment  of  the  past  labor  of  other  people. 

3.  From  the  same  point  of  view,  show  by  examples  drawn  from  indus- 
trial works  that  the  man  who  would  make  improvements  in  future  pro- 
duction on  a  large  scale  is  obliged  to  help  others  in  order  that  he  may 
attain  that  end. 

4.  Of  two  young  men,  the  one  spent  all  his  income  in  expensive  clothing 
and  in  giving  entertainments  to  his  friends,  in  order  to  encourage  trade, 
while  the  other  invested  his  income  in  railway  bonds.     Compare  the  eco- 
nomic effects. 

5.  Give  examples  additional  to  those  in  the  text  of  the  effect  upon 
society  of  a  general  decay  of  the  desire  to  accumulate  wealth  on  the  part 
of  capitalists.     If  none  of  the  next  generation  of  men  should  try  to  get 
more  than  one  hundred  dollars  ahead  of  their  current  expenditure,  what 
would  be  the  result? 

6.  Is  it  better  for  the  typical  laborer  who  is  never  going  to  save  any- 
thing that  the  capital  of  the  country  should  be  mostly  concentrated  in  the 
hands  of  a  few  persons,  each  possessing  an  immense  fortune,  or  tliat  it 
should  be  divided  with  an  approach  to  equality  among  a  great  number 
of  small  capitalists?    Consider  especially  the  case  of  the  New  York  Cen- 
tral and  other  great  railways  of  the  country.     [We  here  suppose  society 
divided  into  two  classes,  a  laboring  class  L,  and  a  capitalist  class  C,  own- 
ing a  definite  quantity  P  of  capital.    We  want  to  know  whether  it  is  better 
for  L  that  the  capital  P  should  be  distributed  equally  among  C  or  concen- 
trated in  a  few  hands.] 


408  TEE  SOCIKTA11Y  CIRCULATION.  [IV.  53. 


CHAPTER  X. 

THE  RELATION  OF  CAPITAL  TO  LABOE. 

52.  As  society  is  constituted,  employment  can  be  given  to 
labor  only  by  and  through  the  instrumentality  of  capital.  That 
is  to  say,  no  person  can  employ  labor  unless  he  has  money  saved 
up  \vhich  he  does  not  -want  for  his  own  immediate  use,  with 
which  to  pay  the  laborers  their  wages.  These  wages  would  be 
of  no  use  to  the  laborer  unless  there  were  sustenance  in  the 
market  for  him  to  buy  with  his  wages.  This  sustenance  must 
be  such  as  the  owner  does  not  want  for  his  own  immediate  sup- 
port, else  he  could  not  afford  to  sell  it.  It  is  sustenance,  as 
already  shown  several  times,  which  constitutes  the  only  real 
wages,  and  in  paying  the  laborer  money  the  employer  only  sup- 
plies him  with  the  means  of  obtaining  the  sustenance.  We 
might  therefore  simplify  the  problem  by  considering  the  em- 
ployer as  the  owner  of  the  sustenance  which  he  gives  the  la- 
borer in  exchange  for  his  work,  were  it  not  for  a  liability  to  be 
misunderstood. 

The  laborer  must  also  have  tools  and  machinery  to  work  with. 
Tools  and  machinery  are  forms  of  capital,  and  must  be  supplied 
by  a  capitalist.  If,  as  may  well  happen,  the  laborer  owns  his 
own  tools,  he  is  himself  to  that  extent  a  capitalist. 

A  third  form  of  the  capital  necessary  to  the  employment  of 
labor  is  the  raw  material  on  which  the  laborer  must  perform 
the  act  of  production.  In  agriculture  the  raw  material  com- 
prises manure  and  seed.  In  the  cotton-mill  it  is  cotton ;  in  a 
clothing-factory  it  is  cloth. 

Fixed  capital  in  the  form  of  tools  and  machinery,  circulating 
capital  in  the  form  of  sustenance,  and  circulating  capital  in  the 
form  of  raw  material  may  therefore  be  regarded  as  immediate 
necessities  to  the  employment  of  labor.  But  it  does  not  at  all 


IV.  53.]        THE  RELATION  OF  CAPITAL  TO  LABOR  4QQ 

follow  from  this  that  there  is  any  mathematical  relation  between 
the  value  of  the  capital  and  the  amount  of  employment  it  gives 
to  labor.  In  digging  up  a  street,  all  the  fixed  capital  necessary 
to  the  employment  of  a  digger  may  be  a  pick  and  spade,  each 
worth  fifty  cents.  In  a  great  cotton-factory  capital  to  the  value 
of  hundreds  of  dollars  may  be  necessary  for  each  operative.  We 
must  therefore  seek  for  some  other  mathematical  measure  of 
capital  than  the  value  of  the  accumulated  fund,  if  we  are  to 
discover  a  mathematical  relation  between  capital  and  the  labor 
it  can  employ.  To  do  this  we  must  refer  to  the  distinction 
already  pointed  out  between  capital  as  a  fund  and  the  flow  of 
capital. 

53.  Let  us  inquire  what  constitutes  the  funded  capital  of  a 
cotton-factory.  We  readily  see  that  the  owners  of  the  factory, 
in  establishing  it  and  putting  it  into  successful  operation,  had  to 
invest  their  capital  in  the  following  way : 

Firstly,  they  had  to  erect  the  necessary  buildings  and  place  in 
them  the  necessary  machinery.  Secondly,  they  had  to  supply 
themselves  with  a  sufficient  quantity  of  raw  material  to  keep 
the  operatives  employed  until  they  begin  to  receive  returns 
from  the  sale  of  the  goods.  In  order  that  they  may  incur  no 
danger  of  the  factory  having  to  stop  for  the  want  of  material, 
it  is  necessary  always  to  have  a  considerable  supply  on  hand. 
Thirdly,  it  was  necessary  to  have  a  sufficient  accumulation  of 
money  to  pay  the  wages  of  the  operatives  until  the  owners  be- 
gin to  be  reimbursed  from  the  sales  of  the  product. 

If  we  take  an  inventory  of  the  invested  capital  at  any  state 
of  its  progress,  we  shall  find  that,  in  addition  to  the  forms  enu- 
merated, there  is  a  greater  or  less  supply  of  the  finished  products 
on  hand  waiting  to  be  sold,  and  a  certain  amount  of  debts  due 
from  parties  to  whom  sales  have  been  made.  It  often  happens 
that  payment  is  not  expected  for  three  or  six  months  after  the 
delivery  of  the  goods.  When  this  is  the  case  the  owners  of  the 
factory  must  have  a  supply  of  raw  material  and  finished  goods 
sufficient  to  keep  the  factory  going  during  the  whole  period 


410  TEE  SOCIETART  CIRCULATION.  [IV.  53. 

that  any  particular  portion  of  the  material  is  undergoing  the 
process  of  manufacture,  and  for  three  or  six  months  longer. 
Thus  at  any  time  we  shall  find  the  capital  to  consist  of  build- 
ings, machinery,  stores  of  raw  material,  material  undergoing 
the  process  of  manufacture,  stores  of  finished  products  waiting 
the  market,  money  in  bank  to  pay  operatives,  and  debts  due 
the  company.  Subtracting  from  these  the  debts  due  from  the 
company,  we  shall  have  the  value  of  the  fund  of  capital. 

In  the  average  normal  case  this  accumulated  fund  varies  very 
slowly,  although  the  principal  items  which  make  it  up  may 
vary  greatly,  one  diminishing  while  the  other  increases.  The 
sum  total  will  represent  the  abstinence  of  the  owners  which  has 
given  rise  to  the  factory.  It  is  the  fund  on  which  they  expect 
to  gain  a  profit  to  compensate  for  this  abstinence. 

But  we  cannot,  merely  from  the  knowledge  of  how  many 
dollars  are  thus  invested,  conclude  what  number  of  laborers 
the  factory  can  give  employment  to.  This  depends  upon  the 
rate  at  which  the  capital  is  being  transformed.  We  are  to  con- 
sider the  capital  as  in  a  constant  state  of  flow,  material  flow- 
ing in  at  one  end,  passing  along  through  the  factory,  and  flow- 
ing out  at  the  other  end.  A  smaller  but  much  slower  flow  is 
going  on  in  the  fixed  capital,  the  machinery  being  worn  out 
and  constantly  needing  labor  to  replace  it.  As  a  part  of  the 
same  process  we  must  consider  the  flow  of  wages  to  the  oper- 
atives. As  already  pointed  out,  this  flow  may  be  considered  as 
coming  from  the  owners  of  the  capital.  Thus  we  may  count 
up  in  all  three  flows  of  capital  to  the  factory :  the  raw  material 
to  be  transformed,  the  sustenance  for  the  operatives  and  man- 
agers to  consume,  and  the  labor  applied  to  the  continual  reno- 
vation of  the  buildings  and  machinery.  From  the  factory  we 
have  the  one  flow  of  finished  products  which  goes  to  society  at 
large.  The  return  flow  of  money,  received  in  exchange  for  the 
finished  products,  branches  off  in  the  three  directions  through 
which  labor  and  material  come  to  the  factory ;  that  is,  one  flow 
of  the  money  goes  to  the  operatives,  another  to  the  suppliers 
and  repairers  of  buildings  and  machinery,  and  a  third  to  the 


IV.  54]        THE  RELATION  OF  CAPITAL   TO  LABOR.  4H 

producers  of  raw  material.  Besides  these  we  have  a  fourth  flow 
to  the  owners  of  the  factory.  Considering  these  owners  purely 
as  capitalists,  this  last  flow  is  their  compensation  for  abstaining 
from  the  enjoyment  of  the  capital  invested  in  the  factory.  In 
so  far  as  they  are  managers  it  is  their  compensation  for  the  skill 
and  labor  which  they  have  expended  in  the  management. 

54.  We  now  see  that  the  efficiency  of  the  factory  as  a  means 
of  employing  labor  depends,  not  upon  the  amount  of  the  accu- 
mulation, but  upon  that  of  the  flow,  especially  of  the  flow  to  the 
operatives.  In  other  words,  the  efficiency  depends  upon  the 
value  per  annum  which  the  factory  can  add  to  the  flow  of  the 
raw  material  passing  through  it.  This,  again,  is  little  more  than 
the  very  obvious  and  childish-looking  proposition  that  the  fac- 
tory can  employ  just  as  many  laborers  as  it  can  profitably  keep 
at  work. 

We  have  now  to  inquire  what  is  the  test  that  the  laborers 
are  profitably  at  work.  The  answer  is  that  the  value  of  the 
product  turned  out  from  the  factory,  considered  as  sustenance, 
must  exceed  the  value  of  the  material  and  labor  devoted  to  the 
work  of  production.  To  take  the  simplest  conceivable  case : 
if  a  laborer,  requiring  no  capital  whatever,  consumes  one  dol- 
lar's worth  of  food  per  day,  and  only  turns  out  a  product  worth 
fifty  cents  a  day,  his  labor  is  unprofitable.  Such  labor  can- 
not be  kept  up  permanently.  If  he  uses  one  dollar's  worth  of 
raw  material  daily,  then,  in  order  that  his  work  may  be  profit- 
able when  he  consumes  at  the  same  rate,  the  product  of  his 
day's  labor  must  be  worth  more  than  the  two  dollars  expended 
in  production. 

Taking  the  largest  view  of  the  case,  the  profitableness  of 
the  factory  is  measured  by  its  capability  of  paying  dividends 
to  its  owners.  If  no  profit  is  made,  then  the  value  of  what 
the  factory  consumes  must  be  equal  to  or  greater  than  that 
of  the  product  turned  out,  and  the  establishment  must  be 
unprofitable  not  only  to  its  owners,  but  to  society  at  large. 


412  THE  SOCIETART  CIRCULATION.  [IV.  55. 

55.  There  are  two  possible  ways  of  measuring  the  benefit 
of  such  capital  as  a  factory  to  laborers,  namely : 

Fallaciously,  by  the  employment  it  gives  to  laborers. 

Correctly,  by  the  sustenance  it  produces  for  laborers. 

Measured  in  the  first  way,  the  laborers  are  considered  as  con- 
sumers, and  the  sustenance  which  they  consume  is  supposed  to 
be  due  to  the  capital  invested  in  the  factory.  But  it  must  never 
be  forgotten  that  this  sustenance  would  never  have  been  avail- 
able if  some  one  else  than  the  laborers  had  not  saved  it,  and 
that  it  was  this  saving,  and  not  the  existence  of  the  factory, 
which  made  it  available.  "We  must  therefore  regard  this 
popular  measure  of  the  benefit  of  the  factory  as  entirely  falla- 
cious. We  should  rather  regard  it  as  the  measure  of  what 
the  factory  costs  society  at  large,  because  labor  is  the  produc- 
ing power  of  society,  and  is  limited  in  supply,  and  the  work 
of  the  factory  may  be  said  to  consume  a  portion  of  this  supply. 

The  true  measure  of  the  value  of  the  factory  is  not  the 
consuming  power  of  the  laborers,  but  the  producing  power  of 
their  work,  or  rather,  as  just  shown,  the  excess  of  the  sus- 
tenance produced  over  that  consumed. 

The  important  question  now  arises :  Let  the  factory  produce 
a  form  of  sustenance  which  the  lower  orders  of  laborers  do 
not  want,  gold  watches  for  example.  Then,  since  the  sus- 
tenance consumed  is  the  food  and  clothing  of  the  operatives, 
the  work  of  the  factory  results  in  a  positive  diminution  of  food 
and  clothing.  Is  its  effect,  then,  not  positively  injurious  to 
the  poorer  classes  ? 

"We  reply,  Yes,  if  we  make  abstraction  of  every  agency  ex- 
cept this  particular  factory.  But,  as  already  shown,  the  work 
of  all  the  factories  of  a  country  is  divided  up  in  proportion  to 
the  demand  for  their  several  products.  We  may  be  sure, 
therefore,  that  for  every  watch-factory  at  work  for  the  wealthy 
there  will  be  a  corresponding  number  of  other  factories  pro- 
ducing coarse  or  fine  food  and  clothing  in  proportion  to  the 
sustenance  demanded  by  the  various  classes  of  society. 


IV.  56.]      LAWS  OF  A  HETEROGENEOUS  CURRENCY.         413 


CHAPTER  XL 

LAWS  OF  A  HETEROGENEOUS  CURRENCY. 

56.  IN  our  consideration  of  monetary,  operations  \ve  Lave 
hitherto  not  taken  account  of  an  j  distinction  between  the  effects 
of  the  various  kinds  of  currency  which  may  be  in  circulation. 
We  have  supposed  that  every  dollar  which  a  man  received  was 
paid  out  by  him  as  soon  as  he  could  satisfactorily  spend  it,  and 
that  he  spent  it  in  the  same  way  whether  it  was  a  gold,  silver, 
paper,  or  credit  dollar.  But  there  are  certain  cases  in  which 
these  different  kinds  of  dollars  will  not  always  be  used  in  the 
same  way,  and  will  therefore  not  have  the  same  economic 
effect. 

Let  us  suppose  that,  in  a  country  using  gold  only  as  money, 
the  currency  is  expanded  by  the  addition  of  irredeemable  paper 
money.  The  first  effect  of  this  addition  to  the  currency  will 
be  a  general  increase  in  the  demand  for  gooda.  This  demand 
will  produce  an  increased  activity  in  trade,  to  be  followed  by  a 
general  rise  in  prices.  Since  this  rise  of  price  is  confined  to 
the  country  in  question,  its  citizens  will  be  led  to  purchase 
goods  abroad,  and  thus  to  export  gold.  It  will  also  lead  them 
to  invest  more  money  in  watches,  jewelry,  picture-frames,  and 
other  things  made  of  gold.  The  result  will  be  a  diminution  in 
the  quantity  of  gold  in  circulation.  The  equilibrium  will  be 
reached  when  the  gold  eliminated  from  the  circulation  is  equal 
to  the  paper  money  which  has  been  added.  The  scale  of  prices 
will  then  be  the  same  as  before,  and  the  only  effect  of  the  change 
will  be  that  paper  has  displaced  a  certain  quantity  of  gold  in 
the  circulation,  in  the  same  way  that  a  stone  placed  in  a  vase 
full  of  water  will  displace  a  volume  of  water  equal  to  its  own 
bulk. 

Another  similar  addition  to  the  currency  will  be  followed 


414  THE  SOCIETAIiT  CIRCULATION.  [IV.  57. 

in  the  same  way  by  a  disappearance  of  another  portion  of  gold  ; 
and  if  the  increase  be  continued,  the  final  result  will  be  that 
all  the  gold  will  disappear  from  circulation.  Besides  being  ex- 
ported and  melted  into  jewelry,  it  will  be  hoarded  up  by  indi- 
viduals and  banks  according  to  a  law  now  to  be  developed. 

57.  Gresham's  Law.  This  law  is  :  A  cheaper  or  depre- 
ciated currency  always  tends  to  displace  a  more  valuable  one. 

At  first  sight  this  statement  may  seem  to  contravene  one  of 
the  admitted  principles  of  economics  by  implying  that  the 
worse  article  is  preferred  to  the  better  one.  But  it  is  really  in 
strict  accord  with  fundamental  principles.  For  the  special  pur- 
pose of  making  an  exchange  bad  money  may  answer  as  well  as 
good  money.  Now,  we  always  prefer  for  any  purpose  the 
cheapest  article  which  will  answer  that  purpose,  unless  some 
evil  to  the  person  using  it  attends  its  use.  For  example,  we 
do  not  make  our  axes  out  of  gold  or  silver,  but  prefer  the 
cheapest  metal,  namely,  steel,  which  will  answer  the  purpose. 
If  there  were  a  community  which  had  to  make  silver  axes  be- 
cause it  had  no  steel,  we  should  find  that  when  that  community 
began  to  trade  with  the  rest  of  the  world,  the  silver  axes  would 
entirely  disappear  and  be  replaced  by  iron  or  steel  ones.  The 
case  is  exactly  the  same  when  gold  is  replaced  by  paper.  As 
silver  can  be  put  to  other  uses  than  making  axes,  so  gold  has 
other  uses  than  that  of  serving  as  money. 

For  a  similar  reason  a  slightly  depreciated  paper  currency 
also  tends  to  displace  any  other  paper  currency  which  is  at  par 
with  gold,  always  provided  that  the  depreciated  paper  is  ac- 
cepted in  trade.  The  rule  is  that  it  will  be  so  accepted  within 
certain  limits.  If  a  bank-note  in  New  York  is  worth  98  cents 
on  the  dollar,  a  retail  dealer  would  rather  accept  it  and  pocket 
the  loss  than  lose  his  bargain  or  run  the  risk  of  ofFendins:  his 

<J  O 

customer.  Then,  since  the  latter  can  only  get  98  cents  for  it 
at  a  bank,  he  will  pay  it  out  in  preference  to  a  good  bill.  The 
very  same  motive  will  prompt  the  dealer  who  receives  the  bill 
to  pay  it  out  in  preference  to  other  bills,  and  thus  the  depre- 


IV.  57.]      LAWS  OF  A  HETEROGENEOUS  CURRENCY.         415 

ciated  money  circulates  with  greater  rapidity  than  any  other. 
No  more  powerful  stimulus  can  be  given  to  trade  than  the  feel- 
ing of  everybody  that  it  is  for  his  interest  to  get  rid  of  money 
as  soon  as  he  receives  it.  Moreover,  if  the  depreciated  cur- 
rency is  circulated  in  such  quantities  that  everybody  expects  to 
receive  it,  then,  instead  of  refusing  it,  the  more  gracious  course 
on  the  part  of  the  dealer  is  to  raise  the  price  of  his  goods. 
Thus,  when  the  bulk  of  the  currency  will  only  bring  90  cents 
on  the  dollar,  it  is  more  to  the  interest  of  the  trader  to  raise  the 
price  of  his  goods  10  per  cent  than  it  is  to  dispute  with  his 
customers  about  the  money  they  offer  him. 

The  most  striking  example  of  the  operation  of  this  law  is  seen 
when,  owing  to  the  depreciation  of  the  currency,  the  metal  in 
the  minor  coins  becomes  more  valuable  than  the  money  in  which 
larger  payments  are  made.  When,  in  the  year  1862,  our 
government  began  to  issue  paper  money  and,  in  consequence, 
a  gold  dollar  became  more  valuable  than  a  paper  dollar,  all  the 
small  silver  coins  disappeared  from  the  circulation.  The  rea- 
son was  that  every  man  who  paid  four  silver  25-cent  pieces  in 
change  for  a  paper  dollar  gave  more  than  the  dollar  was  worth. 
Every  man  who  paid  out  the  25-cent  piece  paid  what  was  worth 
more  than  that  amount.  It  might  indeed  seem  scarcely  credible 
that  the  whole  community  would  put  itself  to  great  inconven- 
ience for  so  insignificant  a  reason.  But  the  result  is  neverthe- 
less an  historical  fact  of  universal  experience.  It  is  probably 
to  be  explained,  not  by  supposing  that  everybody  hoards  his 
small  change  in  the  case  supposed,  but  that  people  here  and 
there  do  so.  If  only  one  man  out  of  ten,  or  even  one  out  of  fifty, 
keeps  all  the  small  change  he  receives,  a  scarcity  very  soon  re- 
sults. 

Let  us  now  return  to  the  case  of  the  infiltration  of  paper 
currency  into  a  gold  circulation.  If  it  be  continued,  the  gold 
will  all  be  displaced.  There  will  also  be  a  slight,  though  not 
necessarily  great  or  permanent,  rise  in  the  scale  of  prices.  If, 
however,  the  addition  of  paper  currency  be  continued,  then,  as 
already  shown,  prices  will  rise ;  or,  in  other  words,  the  curren- 


416  TUE  SOCIKTART  CIRCULATION.  [IV.  58. 

cy  \vill  depreciate.  There  is  no  limit  to  the  possible  amount  of 
this  depreciation.  If  the  paper  money  is  accepted,  which  it 
must  be  if  made  a  legal  tender,  every  one  will  expect  to  be 
paid  in  paper,  and  will  charge  accordingly.  The  gold  dollar 
having  the  same  value  as  before,  gold  will  be  at  a  premium, 
the  banks  will  refuse  to  part  with  it,  and  private  individuals 
will  hoard  it.  It  will  be  bought  and  sold  in  the  public  mar- 
kets like  any  other  commodity,  to  be  exported  to  foreign  coun- 
tries in  payment  of  goods,  or  to  be  made  into  articles  of  utility. 

58.  The  reader  can  now  form  in  his  mind  a  symbolic  pic- 
ture of  the  operation  we  have  described.  To  make  this  picture 
correspond  as  nearly  as  possible  to  the  actual  case  in  our  own 
country,  let  us  suppose  that  our  material  currency  is  of  three 
kinds,  gold,  silver,  and  paper.  The  gold  in  the  gold  dollar  is 
more  valuable  than  the  silver  in  the  silver  dollar,  while  the 
paper  in  the  paper  dollar  is  worth  much  less  than  either.  The 
order  of  absolute  value  is  then  paper,  silver,  gold.  By  Gresh- 
am's  law,  the  silver  tends  to  displace  the  gold,  and  the  paper 
to  displace  both. 

The  question  may  now  arise  how,  on  the  law  in  question, 
it  is  possible  for  the  gold  or  silver  to  circulate  at  all,  if  the 
paper  money  is  preferred  to  make  payments  with.  But  the 
law  does  not  say  that  the  two  heterogeneous  currencies  cannot 
circulate  together,  but  only  that  one  tends  to  displace  the 
other.  The  solution  of  the  difficulty  is  found  in  the  law  al- 
ready laid  down  that,  under  given  conditions  of  trade  and  in- 
dustry, a  certain  volume  of  currency  is  absolutely  necessary  to 
carry  on  the  trade  of  the  country  on  a  certain  scale  of  prices. 
Our  experience  seems  to  show  that  if  our  material  currency 
were  exclusively  of  gold,  we  should  need  about  fifteen  dollars  for 
each  inhabitant,  exclusive  of  the  credit  currency  of  the  banks. 
If  then  we  have  a  population  of  sixty  millions  of  people,  they 
will  need  nine  hundred  millions  of  dollars  in  gold  to  transact 
their  business  on  a  scale  of  gold  prices.  Since  this  amount  is 
absolutely  necessary  to  make  the  payments,  it  follows  that  if 


IV.  58.]      LAWS  OF  A  HETEROGENEOUS  CURRENCY.         417 

there  is  less  than  nine  hundred  millions  in  paper  money,  it  is 
absolutely  necessary  to  make  use  of  silver  or  gold.  If  the  silver 
and  paper  together  are  less  than  this  amount,  some  gold  must 
still  be  used ;  otherwise  prices  would  fall  so  low  that  a  gold 
dollar  would  be  worth  less  than  a  currency  dollar,  and  this 
would  lead  to  the  importation  of  gold  and  thus  remove  all 
temptation  to  hoard  it. 

This  condition  that  nine  hundred  millions  is  necessary  may 
be  represented  to  the  mind  by  the  contents  of  a  vase  which 
holds  just  nine  hundred  millions  of  any  kind  of  dollars.  The 
paper,  silver,  and  gold  currencies  combined  are  then  just  suffi- 
cient to  fill  this  vase  when  the  scale  of  prices  is  on  a  gold  basis. 
The  fact  that  if  we  now  infiltrate  more  paper  into  the  currency 
gold  will  begin  to  pass  out,  is  represented  by  supposing  that 
if  we  now  add  more  paper  to  the  vase  an  equal  quantity  of 
gold  will  overflow.  To  make  the  comparison  complete,  we 
must  suppose  that  the  gold,  though  the  heavier  metal,  tends  to 
float  to  the  top  of  the  vase,  the  silver  to  float  under  it,  and  the 
paper  to  be  at  the  bottom.  Then  if  we  continue  to  pour  in 
paper  money,  the  gold  will  soon  have  floated  out  in  equal  quan- 
tity. When  the  gold  is  all  gone,  the  silver  is  at  the  top  and  be- 
gins to  flow  out.  If  so  much  paper  is  added  as  to  fill  the  vase 
and  displace  all  the  silver,  what  will  then  happen  ?  If  there  is 
any  place  to  which  the  paper  can  flow,  then  it  will  begin  to 
flow  out.  For  example,  if  the  paper  is  redeemable  in  silver  or 
gold,  then,  when  its  volume  exceeds  nine  hundred  millions, 
people  will  take  it  to  the  banks  or  Treasury  for  redemption. 
Thus  it  will  be  impossible  to  get  more  than  the  nine  hundred 
millions  in  circulation. 

If,  however,  it  cannot  be  redeemed,  this  is  the  same  thing  as 
saying  that  the  vase  is  so  closed  that  the  paper  cannot  flow  out 
of  it.  Then  prices  will  rise,  so  that  not  only  will  more  than 
nine  hundred  millions  of  money  be  in  circulation,  but  more  will 
be  necessary  to  the  business  operations  of  the  country.  "We 
may  represent  this  state  of  things  by  imagining  our  vase  to  be 
27 


418  THE  SOCIETART  CIRCULATION.  [IV.  68. 

of  some  flexible  material  which  will  expand  to  any  extent  when 
we  force  paper  money  into  it. 

By  thus  forming  a  mental  picture  of  the  vase  containing, 
from  the  bottom  downwards,  gold,  silver,  and  paper  money, 
and  by  imagining  that  as  one  or  the  other  kind  of  money  is 
added  it  displaces  other  money  in  the  way  described,  or  ex- 
pands the  vase  when  there  is  no  other  money  to  displace,  we 
shall  have  an  exact  conception  of  the  way  in  which  different 
kinds  of  currency  affect  each  other. 

The  law  of  expansion  of  price  when  the  currency  becomes 
too  redundant  explains  a  fact  which  frequently  perplexes  fin- 
anciers who  have  experimented  with  paper  money.  It  is  that 
an  issue  of  such  money  does  not  result  in  a  lowering  of  the 
rate  of  interest,  or  indeed  in  any  accumulation  of  money  at  the 
great  centres  of  trade.  The  supply  of  money  is  apparently  as 
scarce  as  ever  or  scarcer.  The  reason  is  that,  on  the  higher 
scale  of  prices  caused  by  the  money,  more  dollars  are  required 
to  carry  on  the  exchanges  of  the  community. 

ILLUSTRATION  OF  GRESHAWS  LAW  IN  THE  HISTORY  OF  THE 
COINAGE  AND  CURRENCY  OF  THE  UNITED  STATES. 

From  the  establishment  of  the  United  States  mint  to  the  year  1834 
our  gold  dollar  weighed  27  grains  916$  fine,  and  the  monetary  ratio  for  our 
coinage  was  15  : 1.  But  the  market  ratio  of  value  of  the  two  metals  was 
generally  greater  (cf.  II.  68).  The  result  was  that  very  little  gold  was 
coined,  and  that  little  did  not  get  into  common  circulation. 

By  the  acts  of  June  28,  1834,  and  January  18,  1837,  the  weight  and  fine- 
ness of  the  gold  dollar  were  changed  to  those  stated  in  II.  68,  making  the 
ratio  16  : 1.  The  result  was  that  gold  came  into  circulation,  and,  after  the 
gold  discoveries  of  1849,  silver  disappeared  from  circulation  except  as 
subsidiary  coin.  In  1853  the  subsidiary  coins  also  began  to  disappear, 
and,  in  order  to  keep  them  in  circulation,  Congress  had  to  reduce  their 
weight  by  seven  per  cent.  This  device  worked  until  1862.  Then,  when 
large  volumes  of  notes  irredeemable  in  coin  were  issued,  gold  soon  disap- 
peared from  circulation,  and  began  to  command  a  premium.  The  sub- 
sidiary silver  coin  remained  until  the  premium  on  gold  began  to  approach 
ten  per  cent,  and  then  it  disappeared  also,  much  of  it  going  to  Canada.  It 
was  replaced  by  postal  notes.  In  1873  occurred  the  great  fall  in  the  mar- 
ket-price of  silver,  which  restored  the  small  silver  coins  before  the  premium 
on  gold  fell  to  ten  per  cent. 


IV.  59.]  OF  ECONOMIC  FALLACIES.  419 


CHAPTER  XII. 

OF   ECONOMIC   FALLACIES. 

59.  IN  a  former  chapter  certain  fallacies  in  economic  method 
were  described.  These  consist  in  a  generally  incorrect  way  of 
viewing  the  subject  in  its  logical  bearings,  and  do  not  there- 
fore necessarily  lead  to  erroneous  practical  conclusions.  We 
have  now  to  consider  fallacies  which  lead  men  into  incorrect 
views  of  public  policy,  and  opinions  of  governmental  action. 
Although  these  fallacies  are  unlimited  in  the  number  and 
variety  of  their  forms,  we  shall  find  on  analyzing  them  that 
most  of  them  proceed  from  one  central  root,  from  which  they 
divide  like  the  branches  of  a  tree.  The  root  of  the  whole  sys- 
tem consists  in  mistaking  the  means  of  industry  for  its  end. 

Let  us  first  see  how  natural  is  the  process  of  thought  which 
leads  us  to  concentrate  attention  on  means  rather  than  on  ends. 
"We  have  before  us  a  mechanic  who  is,  for  the  time  being,  out 
of  work.  In  consequence  lie  sees  before  him  the  danger  that 
his  family  will  suffer  for  the  necessaries  of  life.  He  wants  a 
supply  of  food  and  clothing  to  protect  them  against  hunger  and 
cold.  But  he  does  not  say  to  his  fellow-men,  "  Give  me  food 
and  clothing,"  because  he  knows  they  cannot  or  will  not  do  it 
when  asked  in  this  way.  He  knows  that  he  must  have  money 
to  buy  the  commodities  he  wants.  He  knows,  however,  that 
it  would  be  equally  useless  to  say,  "  Give  me  money."  He 
knows  that  to  get  money  he  must  work  for  it.  So  what  he 
really  says  to  the  public  is,  "  Give  me  work  to  do,"  although 
what  he  really  wants  is,  not  the  work,  but  the  necessaries  which 
the  work  will  yield  him.  The  work  is  the  means,  and  the  only 
means,  of  commanding  the  necessaries,  but  not  at  all  the  end  of 
his  exertions.  Yet  it  is  by  an  evidently  reasonable  process  that 
he  is  led  to  asking,  not  for  what  he  wants,  but  for  the  means  to 


420  THE  SOCIETART  CIRCULATION.  [IV.  60. 

get  it.  So  far,  therefore,  no  fallacy  actually  shows  itself,  but 
only  an  open  door  through  which  an  unending  line  of  fallacies 
may  come  in. 

GO.  The  first  fallacy  of  the  line  comes  along  in  the  charac- 
ter of  what  might  pass  muster  as  an  obvious  truth,  and  so  is 
harbored  by  all  classes. 

The  laborer  thinks  and  says,  The  greater  the  means  the  more 
perfectly  the  end  will  be  attained;  the  more  work  I  can  get  the 
more  food  and  clothing  lean  buy  for  my  family,  and  the  more 
perfectly  they  will  be  fed  and  clothed. 

The  employer  thinks  and  says,  The  greater  the  demand  for 
my  commodities  the  more  employment  I  can  give  to  my  la- 
borers and  assistants,  and  the  better  off  they  and  I  will  be. 

The  man  of  business  thinks,  The  more  buying  and  selling 
we  can  do  the  better  off  we  will  be,  and  the  more  perfectly  our 
customers  and  patrons  will  be  supplied. 

The  shipper  thinks,  The  greater  the  quantity  of  goods  I  im- 
port and  export  the  more  pleased  the  country  in  general  and 
my  firm  in  particular  will  be. 

The  statesman  says,  The  greater  the  amount  of  rolling  and 
hammering  of  metal  the  more  perfectly  the  country  will  be  sup- 
plied with  those  requirements  of  wealth  which  are  made  of 
metal. 

Is  not  all  this  obvious  and  true  ?  I  answer,  No.  The  propo- 
sitions are  not  true  as  general  ones ;  they  are  true  under  some 
conditions  and  not  under  others.  Their  truth  or  falsity  de- 
pends on  the  manner  in  which  the  increase  of  labor  and  of 
activity  in  business  is  brought  about.  Among  all  classes  of 
society  we  find  men  who  are  desirous  of  increasing  the  activi- 
ties just  described  by  increasing  the  necessity  for  them.  The 
mechanic  finds  that  he  is  out  of  employment  because  some 
large  manufacturer  has  been  introducing  machinery  to  do  the 
work  which  he,  the  mechanic,  formerly  did,  so  that  his  labor  is 
no  longer  necessary.  He  therefore  denounces  the  machine  and 
tries  to  stop  its  products  from  reaching  the  public.  If  success- 


IV.  61.]  OF  ECONOMIC  FALLACIES.  421 

ful,  lie  will  create  a  greater  necessity  on  the  part  of  the  public 
for  employing  him.  The  carpenter  knows  that  if  the  house 
which  he  has  just  built  should  burn  down  the  owner  "would 
be  obliged  to  build  another.  He  therefore  looks  upon  the  fire 
feeling  that,  although  a  loss  is  inflicted  on  some  one  else,  it  is 
a  gain  to  him  by  increasing  the  demand  for  his  labor.  The  la- 
borer feels  that  if  a  dam  is  washed  away  by  a  freshet,  a  benefit 
is  done  him  by  creating  a  demand  for  his  labor.  The  states- 
man says  that  if  we  can  keep  people  from  getting  iron  from 
abroad,  there  will  be  more  made  at  home,  and  thus  all  the 
makers  will  be  benefited.  All  these  we  may  call  labor  falla- 
cies. 

61.  From  this  same  root  comes  out  another  branch,  which 
may  be  called  the  money-fallacy.  Since  money  is  what  the 
laborer  wants  to  buy  with,  and  since  it  seems  evident  that  the 
more  money  the  government  puts  into  circulation  the  more 
easily  he  can  command  it,  he  wants  the  government  to  issue  all 
the  money  it  can.  The  dealer  in  fancy  goods  wishes  that  eco- 
nomical man  who  is  saving  up  his  money  to  spend  it  more  free- 
ly, because  he  can  thereby  give  more  employment  to  labor,  or 
help  somebody  to  do  so.  When  a  great  body  of  summer  tour- 
ists who  had  intended  to  go  abroad  are  kept  at  home  by  the 
cholera,  merchants  congratulate  themselves  that  the  million  of 
dollars  which  they  would  have  carried  away  with  them  are  to 
be  spent  at  home  and  thus  to  benefit  the  country. 

A  curious  feature  of  these  fallacies  is  that  they  are  the  pro- 
duct of  civilized  training,  and  that  a  savage  would  see  their 
logical  character  a  great  deal  more  clearly  and  quickly  than  the 
civilized  man  does.  If  we  could  give  a  savage  a  bird's-eye  view 
of  the  country,  and  explain  to  him  that  from  any  cause  what- 
ever the  people  had  made  more  clothing  than  could  possibly  be 
worn  by  the  whole  community,  and  had  piled  up  greater  quan- 
tities of  food  than  they  could  possibly  eat,  and  that  a  large 
body  of  industrious  foreigners  had  thrust  upon  them  more 
manufactures  of  iron  and  brass  than  they  knew  what  to  do  with, 


422  THE  SOCIET ART  CIRCULATION.  [IV.  62. 

and  that  in  consequence  there  was  a  great  dearth  of  something 
to  do,  his  first  notion  would  be  that  this  was  a  very  happy  state 
of  things  for  the  people  of  the  country.  It  would  require  long 
years  of  training  to  make  him  conceive  how  it  could  be  an  un- 
happy state  of  things,  and  possibly  the  attempt  might  utterly 
fail.  Now,  in  reality,  and  from  the  point  of  view  of  common- 
sense,  the  savage  would  be  right.  Looking  at  the  subject  from 
the  savage's  standpoint,  we  see  the  utter  absurdity  of  supposing 
that  it  can  be  bad  for  a  country  to  have  more  of  the  commodi- 
ties of  life  within  its  borders  than  its  people  know  what  to  do 
with. 

62.  The  essential  character  and  plausibility  of  the  labor- 
fallacy  may  be  shown  by  the  following  illustration.  A  farmer 
is  carrying  hay  to  market.  The  county  authorities  prepare 
for  him  a  very  fine  smooth  road.  It  is  obvious  to  him 
that  the  better  his  horse  pulls  the  more  hay  he  will  get  to 
market.  A  stranger  meets  him  on  the  road  and  finds  him 
applying  this  principle  by  lubricating  his  wheels  with  sand  in- 
stead of  oil.  Inquiring  the  motive  of  this  ingenious  device,  the 
stranger  is  asked  whether  he  can  deny  that  the  better  the  horse 
pulls  the  more  hay  he  will  get  to  market. 

The  stranger  is  not  prepared  to  deny  this  principle. 

**  The  more  sand  I  put  on  my  wheels  the  better  I  find  my 
horse  to  pull."  The  stranger  cannot  deny  this  either. 

"Therefore  it  is  an  undeniable  conclusion  that  the  more 
sand  I  put  upon  my  wheels  the  more  hay  I  will  get  taken  to 
market." 

The  student  can  have  no  more  instructive  exercise  than  that 
of  framing  a  series  of  ingenious  devices  by  which  the  farmer 
could  baffle  every  argument  of  the  stranger  to  prove  that  this 
position  was  unsound.  He  could  show  that  his  neighbor,  who 
put  oil  on  his  wheels,  had  a  very  poor  miserable  horse,  while  he 
himself  had  a  strong  and  sound  one,  and  all  the  result  of  the 
exercise  he  was  thus  enabled  to  get  by  the  sanding  policy.  He 
could  taunt  the  stranger  with  being  the  agent  of  some  oil-mer- 


IV.  62.]  OF  ECONOMIC  FALLACIES.  423 

chant  who  wanted  him  to  buy  oil  in  lieu  of  the  lubricant  which 
he  could  have  for  nothing  on  the  wayside.  He  could  demand 
if  the  stranger  ever  knew  a  case  in  which  a  horse  that  pulled 
well  got  less  hay  to  market  than  one  that  did  not  pull  at  all. 
He  could  cite  the  case  of  a  fellow-farmer  who  had  been  using 
oil  and  whose  horse  got  so  frisky  and  pulled  so  light  a  load  that 
he  ran  away  and  destroyed  the  hay-cart  and  broke  the  farmer's 
leg. 

The  corresponding  reasoning  in  the  case  of  the  laborer  is 
simply  this : 

The  more  my  labor  is  in  demand  the  more  perfectly  my 
family  will  be  supplied  with  the  necessaries  of  life. 

But  the  greater  the  need  I  create  for  my  labor  the  more  it 
will  be  in  demand. 

Therefore  I  advocate  a  policy  which  will  make  people  need 
my  labor. 

So  the  dealer  tries  to  make  clothes  as  scarce  and  dear  as  pos- 
sible in  order  that  everybody  else,  mechanic,  laborer,  hod-car- 
rier, merchant,  and  man  of  business,  may  be  in  greater  need  of 
clothes.  The  carpenter,  bricklayer,  and  plasterer  want  houses 
to  wear  out  as  fast  as  possible,  that  the  public  need  for  houses 
may  lead  to  their  employment.  The  manufacturers  of  copper 
and  iron  want  to  cut  off  the  foreign  supply  of  their  product, 
that  the  public  may  be  in  greater  need  of  it.  The  cooper  wants 
barrels  made  scarce,  that  the  public  may  be  in  greater  need  to 
employ  him.  Thus  the  individual  efforts  of  every  man  to  col- 
lect the  largest  supply  of  the  necessaries  of  life  is  accompanied 
by  a  general  feeling  throughout  all  society  that  other  people 
ought  to  continue  in  need  of  these  necessaries. 

It  goes  almost  without  saying  that  no  man  ever  applied  the 
principle  in  his  own  individual  case.  We  never  heard  of  a  man 
who,  through  some  miscalculation,  had  bought  more  clothes 
than  he  could  wear,  throwing  them  away  or  burning  them  in 
order  that  he  might  have  an  inducement  to  buy  more. 

We  have  mentioned  examples  of  these  fallacies  in  a  few  of 
the  many  forms  in  which  we  daily  see  them  in  the  newspapers, 


424  TUE  SOCIETART  CIRCULATION.  [IV.  63. 

in  the  speeches  of  Congressmen,  the  resolutions  of  labor  and 
socialistic  meetings,  and  tacitly  and  by  implication  in  the  re- 
strictive rules  of  trades-unions.  In  some  of  these  examples  the 
fallacy  will  be  obvious  enough  to  the  reader.  In  others  he  may 
find  it  to  need  illustration.  We  may  take  as  a  typical  average 
case  that  of  a  house  which  is  burned  down.  By  this  accident 
the  owner  is  undoubtedly  injured ;  but  are  not  carpenters, 
bricklayers,  and  plasterers  thereby  benefited,  either  to  a  degree 
equivalent  to  the  loss  of  the  house,  or  at  least  to  an  apprecia- 
ble fraction  of  it  ?  We  answer,  No.  It  is  true  that  these  indi- 
vidual mechanics  who  may  be  employed  to  build  the  house  may 
be  benefited  in  a  slight  degree,  but,  as  has  already  been  shown, 
the  demand  for  labor  is  not  increased  by  the  destruction  of  the 
house.  The  sum  which  the  owner  is  now  to  spend  in  the  em- 
ployment of  bricklayers,  carpenters,  and  plasterers  would,  had 
the  house  remained,  have  been  expended  by  him,  or  by  those 
from  whom  he  is  to  borrow  the  money,  in  the  employment  of 
labor  in  other  forms.  The  demand  for  labor  which  is  thus 
gained  in  one  direction  is  lost  in  another  direction,  and  one 
class  gains  at  the  expense  of  another.  On  the  other  hand,  the 
owner  of  the  house  has  lost  its  whole  value,  and,  on  the  whole, 
the  total  loss  to  the  community  is  measured  by  that  of  the 
house. 

63.  Special  Consideration  of  the  Money  Fallacy.  The 
fallacy  which  we  have  now  to  consider  in  detail,  although  from 
the  same  root  as  the  labor  fallacy,  has  little  in  common  with  it, 
and  has  an  entirely  different  history.  The  labor  fallacy  may 
be  described  as  affecting  the  great  mass  of  the  community  in  a 
mild  form,  and  as  not  varying  much  from  year  to  year  or  from 
generation  to  generation.  The  money  fallacy,  on  the  other 
hand,  is  periodic,  overwhelming  us,  not  at  regular  intervals,  but 
from  time  to  time,  owing  to  the  influence  of  changing  events. 
The  Americans  more  than  any  other  people  have  been  its  vic- 
tims. It  was  at  its  height  during  the  ten  years  following  the 
outbreak  of  the  Civil  War.  During  the  decade  following  it 


IV.  63.]  OF  ECONOMIC  FALLACIES.  425 

greatly  subsided ;  and  at  the  present  time,  although  shared  by  a 
large  party,  is  not  doing  serious  damage.  Yet  it  is  constantly 
latent  in  human  nature,  and  therefore  liable  to  break  out  at  any 
time  after  the  disastrous  effects  of  the  policy  it  gives  rise  to  on 
one  generation  have  been,  forgotten  by  the  succeeding  one.  It 
is  therefore  one  which  the  student  of  economics  should  thor- 
oughly understand.  It  consists  in  considering  the  monetary 
unit  which  we  call  one  dollar  as  an  absolute  measure  of  value, 
deriving  its  existence  and  its  value  from  law. 

During  the  years  1862  and  1863  our  government  issued 
hundreds  of  millions  of  legal-tender  notes  to  circulate  as  money. 
The  result  was  a  gradual  but  continual  rise  in  prices,  until  the 
great  body  of  things  which  people  had  to  buy  cost  twice  as 
much  as  before.  Wise  men  said  the  dollar  was  depreciated  to 
one  half,  but  the  public  said  the  paper  dollars  were  as  good  as 
any  other  dollars  because  they  performed  all  the  functions  of 
dollars.  No  one  had  any  difficulty  in  passing  off  all  the  money 
that  he  received,  and  having  it  accepted  as  that  number  of 
dollars  which  it  pretended  to  be.  Money,  it  was  reasoned,  was 
only  the  medium  of  exchange.  A  man  gets  it  by  selling  only 
that  he  may  buy  with  it ;  and  if  he  can  do  this,  what  more 
is  wanted  ? 

The  reply  is  :  One  very  important  thing  more  is  wanted.  He 
must  not  only  be  able  to  buy  with  it,  but  he  must  be  able  to  buy 
a  dollar's  worth.  The  other  replies,  But  he  does  get  a  dollar's 
worth.  A  dollar's  worth  is  exactly  what  a  dollar  will  bring, 
and  he  certainly  gets  that.  You  cannot  enforce  any  law  pre- 
scribing how  much  a  dollar  shall  bring. 

The  economist  admits  all  this,  but  yet  claims  that  something 
is  wanting.  Although  the  man  who  takes  a  dollar  cannot  have 
any  authoritative  and  legal  understanding  as  to  how  much  he 
can  buy  with  that  dollar  next  week  or  next  year,  yet  he  does 
want  to  feel  a  reasonable  assurance  that  he  can  buy  as  much 
with  it  then  as  lie  can  now.  If  he  builds  a  house,  neither  the 
builder  nor  the  law  itself  can  guarantee  him  against  the  house 
being  demolished  by  an  earthquake,  unroofed,  burned  by  a  fire, 


426  THE  SOCIETART  CIRCULATION.  [IV.  63. 

or  worn  out  by  the  action  of  the  weather.  But  because  he 
cannot  have  such  a  guarantee,  it  does  not  therefore  follow  that 
he  should  not  care  how  combustible  the  materials  are  and  how 
poorly  the  house  is  built.  Notwithstanding  the  impossibility 
of  the  guarantee,  he  wants  a  house  that  will  probably  be  as  good 
next  year  as  it  is  this,  and  which  will  endure  for  the  use  of  his 
children  and  grandchildren. 

Now,  it  is  the  same  with  a  dollar.  If  he  foresees  a  reasona- 
able  probability  that  a  year  hence  his  dollar  will  only  buy  him 
the  tenth  part  of  a  dinner,  then  it  can  no  more  fulfil  the  func- 
tions of  a  dollar  with  him  than  the  house  which  is  sure  to 
decay  in  a  year  can  fulfil  the  functions  of  a  house.  He  wants 
a  dollar  which  will  buy  as  good  a  dinner  next  year  as  it  will 
now,  and  which,  if  he  invests  it,  will  buy  as  good  a  dinner  for 
his  grandchildren  as  it  will  for  him.  If  Congress  is  to  furnish 
him  the  dollar,  the  impossibility  of  an  absolute  guarantee  of 
this  sort  does  not  justify  the  issue  of  a  dollar  which  it  is  cer- 
tain will  not  fulfil  the  required  conditions. 

The  fallacy  on  which  all  this  difficulty  rests  is  that  of  looking 
upon  the  dollar  as  an  absolute  standard  of  value.  During  the 
period  above  referred  to  a  gold  dollar  was  worth  two  or  more 
dollars  in  paper.  This  was  a  state  of  things  which  many  in- 
telligent people  had  a  difficulty  in  understanding,  and  which 
they  attributed  to  the  machinations  of  speculators.  They  rea- 
soned that  both  the  gold  and  silver  dollars  derived  their  value 
from  laws  of  Congress,  and  were  declared  of  equal  value  by 
this  authority.  Therefore  the  value  must  really  be  the  same, 
although  in  "Wall  Street  and  at  the  banks  they  were  considered 
different.  The  answer  to  this  is  that  a  dollar  is  not  a  stand- 
ard of  value  in  any  other  sense  than  a  foot  is.  If  Congress 
should  legalize  two  different  lengths  and  declare  each  of  them 
a  foot,  that  would  not  make  them  equal.  If  it  should  direct 
the  foot  measure  to  be  made  of  a  kind  of  material  which  would 
shrink  in  a  few  days  to  one  half  its  length,  yet  although  this 
measure  might  be  called  a  foot,  it  would  not  be  of  the  same 
length.  In  declaring  anything  one  dollar  Congress  only  gives 


IV.  63.]  OF  ECONOMIC  FALLACIES.  427 

it  a  name,  but  does  not  give  a  value.  The  principle  involved 
may  be  expressed  as  follows :  Calling  an  object  one  dollar,  and 
declaring  it  a  legal  tender  for  that  amount,  no  more  gives  it  a 
definite  value  than  declaring  apiece  of  metal  to  be  afoot  gives 
it  a  definite  length. 

We  qualify  the  word  value  here  by  the  word  definite,  be- 
cause, as  we  shall  hereafter  see,  this  proposition  is  subject  to  an 
important  limitation.  Thus  the  difficulty  which  men  experi- 
ence in  understanding  how  there  can  be  two  values  to  the  dollar 
is  as  absurd  as  a  difficulty  in  seeing  how  two  different  lengths 
could  each  be  one  foot.  The  reason  why  a  difficulty  is  felt  in 
the  one  case  which  is  not  felt  in  the  other  is  that  length  is 
something  which  can  be  made  evident  to  the  eye,  while  value 
is  not.  The  inequality  of  two  foot  measures  is  made  evident 
by  merely  putting  them  together  and  seeing  how  they  look. 
The  inequality  of  two  dollars  can  be  shown  only  by  going  into 
the  public  market  with  them  and  seeing  how  much  they  will 
respectively  buy.  Even  then  the  inequality  is  manifest  only  to 
the  eye  of  reason  and  not  to  the  e3re"of  sense. 

Connected  with  this  notion  is  the  belief  that  the  dollar  de- 
rives its  value  from  the  government  stamp  upon  it.  This 
belief  admits  of  a  test  so  simple  that  it  is  wonderful  how  it  can 
acquire  the  currency  it  does.  Were  it  correct,  a  coin  might  be 
vastly  more  valuable  than  the  bullion  out  of  which  it  was  made, 
and  the  excess  of  value  would  depend  on  the  greatness  and 
power  of  the  nation  by  which  it  was  stamped.  But,  as  a  mat- 
ter of  fact,  leaving  out  the  expense  of  minting,  and  the  excep- 
tional cases  of  fractional  currency,  the  value  of  any  coin  is 
exactly  that  of  the  bullion  from  which  it  is  stamped.  The 
dollars  of  the  poorest  South  American  states,  the  sovereigns  of 
England,  and  the  uncoined  gold  bars  fresh  from  the  mines,  all 
exchange  in  the  markets  of  the  world  according  to  the  amount 
of  gold  or  silver  in  them. 


428  TUB  SOCIETARY  CIRCULATION. 

ILL  USTRA  TIONS. 

1.  JUuttration  of  the  Labor  Fallacy.  ' '  Have  you  ever  witnessed  tlie  anger 
of  the  good  shopkeeper  Jacques  Bouhomme  when  his  careless  son  happened 
to  break  a  square  of  glass?  If  you  have  been  present  at  such  a  scene  you 
will  most  assuredly  bear  witness  to  the  fact  that  every  one  of  the  spectators, 
were  there  even  thirty  of  them,  by  common  consent,  apparently,  offered 
the  unfortunate  owner  this  invariable  consolation :  '  It  is  an  ill  wind  that 
blows  nobody  good.  Everybody  must  live,  and  what  would  become  of  the 
glaziers  if  panes  of  glass  were  never  broken? '  Now,  this  form  of  condolence 
contains  an  entire  theory  which  it  will  be  well  to  show  up  in  this  simple 
case.  .  .  .  Suppose  it  cost  six  francs  to  repair  the  damage;  we  say  that  the 
accident  brings  six  francs  to  the  glazier's  trade — that  it  encourages  that  trade 
to  the  amount  of  six  francs.  I  grant  it.  I  have  not  a  word  to  say  against  it. 
You  reason  justly.  The  glazier  comes;  performs  his  task;  receives  his  six 
francs;  rubs  his  hands;  and,  in  his  heart,  blesses  the  careless  child.  All 
this  is  that  which  is  seen.  But  if,  on  the  other  hand,  you  came  to  the  con- 
clusion that  it  is  a  good  thing  to  break  windows,  that  it  causes  money  to 
circulate,  and  that  the  encouragement  of  industry  in  general  will  be  the 
result  of  it,  you  will  oblige  me  to  call  out,  '  Stop  there;  your  theory  is  con- 
fined to  that  which  is  seen.  It  takes  no  account  of  that  which  is  not  seen.' 

"  It  is  not  seen  that  as  our  shopkeeper  has  spent  six  francs  upon  one  thing 
he  cannot  spend  them  upon  another.  It  is  not  seen  that  if  he  had  not  had 
a  window  to  replace  he  would  perhaps  have  replaced  his  old  shoes,  or  added 
another  book  to  his  library;  in  short,  he  would  have  employed  his  six  francs 
in  some  way  which  this  accident  has  prevented. 

"  Let  us  take  a  view  of  industry  in  general  as  affected  by  this  circum- 
stance. The  window  being  broken,  the  glazier's  trade  is  encouraged  to  the 
amount  of  six  francs;  this  is  that  which  is  seen. 

"  And  if  that  which  is  not  seen  is  taken  into  consideration,  it  will  be  un- 
derstood that  neither  industry  in  general  nor  the  sum  total  of  national 
labor  is  affected,  whether  windows  are  broken  or  not. 

"If  the  window  had  not  been  broken,  the  shoemaker's  trade  (or  some 
other)  would  have  been  encouraged  to  the  amount  of  six  francs:  this  is  that 
which  is  not  seen. 

"Now  let  us  consider  Jacques  Bonhomme  himself.  In  the  former  sup- 
position, that  of  the  window  being  broken,  he  spends  six  francs,  and  has 
neither  more  nor  less  than  he  had  before,  the  enjoyment  of  a  window. 

"  In  the  second,  where  we  supposed  the  window  not  to  have  been  broken, 
he  would  have  spent  six  francs  in  shoes,  and  would  have  had  at  the  same 
time  the  enjoyment  of  a  pair  of  shoes  and  of  a  window. 

"Now,  as  Jacques  Bonhomme  forms  a  part  of  society,  we  must  come  to 
the  conclusion  that,  taking  it  all  together,  and  making  an  estimate  of  its  en- 
joyments and  its  labors,  it  has  lost  the  value  of  the  broken  window."— 
F.  Bastiat,  tranxlaled  by  Mrs.  Fawceft. 


ILLUSTRATIONS.  429 

2.  Illustration  of  the  Money  Fallacy.  The  following  was  written  before 
the  resumption  of  specie  payments,  at  a  time  when  tbe  country  had  not  re- 
covered from  the  financial  notions  produced  by  the  Civil  War : 

In  the  world  of  business  "credit"  includes  the  ability  and  the  obligation 
to  pay  all  demands  in  cash  as  they  become  due.  A  man  or  a  firm  that  can- 
not do  this  has  no  credit,  however  excellent  it  may  be  in  other  respects. 
Suppose  you  should  be  travelling  in  a  distant  city  and,  going  to  the  cashier 
of  your  hotel  for  change,  he  hands  you  a  ten-dollar  bill  on  the  banking  firm 
of  Spread  Brothers  &  Company. 

"Are  you  sure  this  bill  is  good  ?"  you  inquire.  "Good  as  gold,  sir. 
The  firm  of  Spread  Brothers  &  Co.  is  the  greatest  in  this  State,  possessed  of 
unbounded  wealth,  and  its  operations  extend  over  the  whole  globe." 

"Then,"  you  reply,  "  I  suppose  if  I  take  this  bill  to  their  counter,  they 
will  pay  it?  " 

"  Pay  it?  Why,  no,  sir.  You  would  be  hooted  by  the  small  boys  in  the 
street  and  laughed  at  by  Spreads'  clerks.  The  credit  of  the  firm  is  so  ex- 
cellent and  all  its  debts  so  well  secured  by  real  estate  and  bonds  worth 
millions  of  dollars  that  both  the  firm  and  the  community  concluded  ten 
or  twelve  years  ago  that  there  was  not  the  slightest  need  of  their  redeeming 
their  bills,  and  they  are  never  going  to  do  it." 

"  I  don't  understand  that  kind  of  credit.  In  my  State,  credit  paper  is 
something  which  the  party  issuing  is  bound  to  pay  when  required;  and  if 
he  does  not  pay,  he  has  no  credit,  no  matter  how  rich  he  is." 

"  Of  course  twopenny  firms  must  pay.  But  we  claim  that  a  firm  so 
great,  so  powerful,  and  so  wealthy  as  that  of  the  Spreads  need  not  pay." 

"Well,  sir,"  you  would  reply,  "  I  don't  see  what  difference  it  makes  to 
me  how  wealthy  Spreads'  firm  is,  or  how  well  their  paper  is  secured,  if  I 
cannot  get  any  of  their  wealth  in  exchange  for  my  bill.  I  always  thought 
the  advantage  of  having  the  paper  of  a  wealthy  firm  was  that  it  was  sure  to 
be  paid;  but  if  the  richer  the  firm  the  less  the  need  of  paying,  I  would 
rather  have  the  bill  of  some  smaller  house." 

"Ah,  you  know  nothing  about  finance,  I  sec,  and  I  will  get  you  some 
foreign  money  rather  than  argue  further  with  you." 

If  a  hotel  cashier  should  talk  in  this  way  to  you,  you  would  be  a  little 
puzzled  to  say  whether  he  was  joking  or  in  earnest:  and  yet  great  statesmen 
do  argue  in  just  that  way  about  our  greenbacks.  There  are  bills  to  the 
amount  of  four  hundred  millions  of  dollars  afloat,  reading,  "The  United 
States  will  pay  the  bearer  —  dollars."  Yet  if  you  should  take  one  of 
these  bills  to  the  government's  counter  asking  that  this  promise  be  redeemed, 
the  clerks  would  laugh  at  you.  A  year  or  two  since  some  one  did  this  very 
thing,  and  the  newspapers  speculated  on  the  man's  sanity,  while  a  Treasury 
official  thought  he  was  only  trying  to  make  himself  notorious.  If  a  politi- 
cian tries  to  justify  permanent  non-payment,  he  will  talk  about  the  credit 
and  wealth  of  the  nation  exactly  as  the  hotel  clerk  talked  about  Spread 
Brothers  &  Go.— The  A  D  C  of  Finance,  by  S.  Newcomb. 


430  TUB  SOCIETART  CIRCULATION. 

8.  An  apt  analogue  of  the  money  fallacy  may  be  constructed  by  supposing 
that  the  people  of  St.  Louis  deemed  it  greatly  to  their  interest  that  the 
flow  of  the  Mississippi  should  be  increased.  Let  us  suppose  that  in  order 
to  bring  this  about  they  erect  powerful  machinery  which  is  to  turn  im- 
mense paddle-wheels  whose  blades  dip  below  the  water  and  project  it 
down  the  river.  As  each  wheel  turns  it  causes  a  great  rush  of  water 
from  it,  and  thus  an  apparent  increase  in  the  flow.  If  we  could  imagine 
n  person  with  as  little  idea  of  the  flow  of  the  river  as  a  mathematical 
quantity  as  the  ordinary  man  has  of  the  industrial  flow,  as  such,  we  may 
see  how  strong  the  impression  such  a  person  would  have  that  the  flow  of 
the  river  is  really  increased  by  the  machinery.  His  eyes  show  him  the 
rush  and  foaming  of  the  water  wherever  the  machine  operates,  while  the 
tide  goes  on,  apparently  the  same  as  before,  wherever  it  does  not  operate. 
The  way  in  which  we  should  show  this  man  the  error  of  his  views  is  also 
analogous  to  that  which  we  have  employed  in  showing  the  monetary  fallacy. 
We  should  say  to  him: 

"The  flow  of  the  river  past  your  city  is  necessarily  equal  to  the  sum 
total  of  the  water  which  comes  to  it  from  the  mountains.  Your  machinery 
cannot  possibly  change  the  streams  from  the  mountains,  and  therefore  it 
cannot  change  the  flow  of  the  river.  True,  there  is,  as  you  say,  a  greater 
flow  where  your  wheels  act;  but  this  is  necessarily  accompanied  by  a 
diminution  of  the  flow  in  the  great  masses  of  water  below,  which  you  do 
not  see." 

The  reason  why  a  mistake  such  as  this  is  so  common  in  the  case  of 
economics  and  not  possible  in  the  case  of  the  river  is  that  in  the  latter  the 
mind  can  form  a  conception  of  the  real  state  of  things  without  special 
training,  while  in  the  former  it  cannot.  If  we  imagine  a  person  spending 
his  life  in  managing  the  supposed  paddle-wheel  and  seeing  the  rush  of 
water  from  it,  without  ever  forming  any  conception  either  of  the  magni- 
tude of'  the  river  or  of  the  source  of  its  waters,  we  see  how  naturally  he 
might  be  gradually  led  to  believe  that  the  flow  of  the  river  depended  on 
his  machinery.  But  this  person  would  be  in  the  same  state  of  mind  as 
the  average  man  in  relation  to  the  course  of  trade  and  industry.  In  show- 
ing the  latter  the  true  relations  of  things  we  do  for  him  what  we  Should 
do  for  the  supposed  man  in  showing  him  the  source  and  magnitude  of 
the  river. 

EXERCISES, 

1.  Consider  the  following  ways  in  which  a  man  may  gain  wealth,  and  in- 
vestigate in  each  case  whether  his  gains  are  to  be  regarded  as  additions 
made  by  himself  to  the  total  wealth  of  the  country  without  being  detri- 
mental to  the  rest  of  the  community,  how  far  they  are  made  at  the  expense 
of  particular  individuals  with  whom  he  may  have  had  dealings,  and  how 
far  as  made  at  the  expense  of  the  community  in  general : 


EXERCISES.  431 

1.  He  bets  with  a  broker  about  the  future  price  of  stocks,  and  wins. 

II.  He  invests  in  stocks  and  bonds,  which  rise  in  price  in  consequence  of 
increased  prosperity  of  the  railways  and  manufacturing  companies  which 
issue  them. 

III.  He  invents  a  new  method  of  boot-making,  and  employs  a  great  body 
of  artisans  in  making  boots  by  this  method  at  a  profit  to  himself. 

IV.  He  borrows  money  and  builds  a  railway,  the  dividends  of  which  pay 
all  the  interest  on  his  debt  and  yield  him  a  large  additional  income. 

V.  He  patents  a  new  sewing-machine,  which  turns   out  to  be  a  great 
success. 

VI.  He  discovers  and  buys  a  valuable  mine. 

VII.  He  sets  up  a  large  grocery-store,  and  manages  to  sell  so  cheaply  as  to 
attract  all  the  customers  from  a  great  number  of  other  stores,  and  compel 
the  latter  to  retire  from  business. 

VIII.  He  discovers  an  excellent  silk-maker  in  the  interior  of  France,  buys 
his  products,  and  sells  them  at  a  profit  in  New  York. 

2.  Consider  also  whether,  in  any  of  the  preceding  cases,  the  community 
at  large  necessarily  gains,  as  well  as  the  man  who  makes  the  money,  and 
in  what  their  gains  consist.     [Apply  the  principles  of  Chapter  V.] 

8.  Show  that  it  is  impossible  for  a  nation  to  adopt  such  a  policy  that 
there  shall  be  any  great  continuous  and  unceasing  increase  in  its  stock  of 
the  precious  metals,  and  that  the  general  world's  stock  of  those  metals  tends 
to  distribute  itself  among  all  nations  in  proportion  to  their  need  for  using 
them  as  money. 

4.  Explain  how  it  is  that  in  a  very  poor  community  the  volume  of  the 
currency  is  in  a  yet  smaller  proportion  than  the  volume  of  business  trans- 
acted.     [This  involves  the  conclusion  that  the  rapidity  of  circulation  is 
greater  in  such  a  community.     Cf.  Chap.  II.] 

5.  In  a  new  country,  where  the  rate  of  interest  is  high,  people  are  most 
desirous  to  borrow  money.     Suppose  wealthy  foreigners  to  loan  them  all 
the  gold  and  silver  they  wanted,  but  with  the  enforced  stipulation  that 
none  of  it  should  be  exported:  what  would  be  the  economic  effect  upon 
the  community?    Would  it  be  materially  beneficial? 

6.  Suppose  the  loan  made  without  stipulation:  what  would  the  com- 
munity do  with  the  money  ?   What  would  determine  the  benefit  they  would 
derive  from  it  ? 

7.  From  your  answers  to  the  two  preceding  questions,  explain  what  is 
really  done  when  foreigners  invest  capital  in  a  country  where  the  rate  of 
interest  is  high.     Does  the  act  of  investment  commonly  consist  in  sending 
money  thither?    If  so,  what  becomes  of  the  money?    If  not,  what  is  sent? 

NOTE.  In  all  such  questions  as  these  it  will  assist  the  student  to  begin 
with  a  simple  concrete  case.  For  example,  suppose  that  in  the  new  country, 


432  THE  BOCIETART  CIRCULATION. 

Colorado  for  example,  n  great  profit  can  be  made  by  working  a  mine  and 
building  a  railway  to  it.  So  a  Colorado  banker  offers  ten  per  cent  per  an- 
num interest  on  all  money  borrowed.  One  London  capitalist  loans  him 
$10,000,  which  he  ships  as  gold,  and  another  sends  him  a  cheque  on  his 
London  banker  for  £2000.  Trace  out  what  the  Colorado  people  will  do 
with  the  gold  and  the  cheque,  drawing  a  diagram  of  the  monetary  and  in- 
dustrial operations  to  which  the  loans  give  rise. 

8.  Suppose  that  during  the  Civil  War  our  government  had  adopted  the 
policy  of  preventing  the  Southern  States  from  importing  anything  but  gold 
and  silver,  but  had  allowed  them  to  export  anything  they  pleased:  what 
would  have  been  the  effect  upon  the  price  of  commodities  within  their 
limits,  and  upon  the  power  of  the  Confederate  Government  to  prosecute  the 
war? 

This  presupposes  the  blockade  modified  to  this  extent :  that  no  ship 
would  be  allowed  to  enter  the  Southern  ports  if  she  carried  anything  except 
gold  and  silver,  but  she  might  carry  in  as  much  of  these  metals  as  she  chose. 

On  leaving  the  port  no  restriction  is  supposed  to  be  placed  upon  what  she 
carried  out. 

If  one  should  answer  the  foregoing  question  in  this  way  :  Gold  and  silver 
are  the  sinews  of  war,  and  hence  the  free  introduction  of  these  articles 
would  have  increased  the  power  of  the  Confederate  Government  to  carry 
on  the  war; — would  he  be  correct? 

If  one  should  answer  it  by  saying  this  policy  would  have  been  demoraliz- 
ing to  the  Confederate  Government  by  acting  as  a  bribe  to  the  people  to 
expend  all  their  energies  in  raising  cotton  for  export,  instead  of  employing 
them  in  war,  would  he  be  correct?  Could  the  importation  of  anything 
which  could  not  produce  either  sustenance  or  munitions  of  war  help  a 
people  so  situated  ? 

It  is  essential  to  a  complete  discussion  and  conclusion  on  this  subject  that 
the  student  should  consider  to  what  extent  the  Confederate  Government 
could  have  got  possession  of  the  gold  imported.  This  action  would  have 
depended  upon  their  power  to  get  possession  of  the  cotton  or  other  goods 
exported;  this,  again,  would  have  depended  principally  upon  the  willingness 
of  the  planters  to  raise  cotton,  not  for  their  own  benefit,  but  for  that  of  the 
government. 

9.  The  inhabitants  of  a  city  conclude  that  hack-drivers  are  an  exception- 
ally meritorious  class  of  citizens,  and  so  resolve  to  expend  all  their  surplus 
income  in  hack-hire.     Are  hackmen  going  to  be  permanently  benefited? 
What  will  be  the  economic  effect?    (Cf.  III.  35  and  Bk.  IV.,  Chap.  VI.) 

10.  Are  we  to  regard  the  consumption  of  commodities  as  productive  of 
any  benefit  to  the  producers,  or  is  that  benefit  confined  to  the  consumers? 
For  example,  are  we  to  regard  an  increased  consumption  of  tea  as  benefi- 


EXERCISES.  433 

cial  to  grocers?    As  beneficial  to  the  inhabitants  of  China?    Explain  why 
the  answer  is  not  the  same  in  all  cases. 

11.  Trace  the  economic  effect  of  the  frugal  New  England  population  put- 
ting their  money  into  savings  banks.    What  do  such  savings  really  consist 
in? 

12.  Show  the  relative  advantages  to  a  spendthrift  of  living  in  a  frugal 
and  of  living  in  a  free-spending  community.    Define  the  difference  between 
two  such  communities. 


28 


434  TUB  SOCIETART  CIRCULATION. 


APPENDIX  TO  BOOK  IV.— THE  RELATION  OF  DEMAND  FOR 
COMMODITIES  TO  DEMAND  FOR  LABOR. 

IT  is  the  plan  of  the  present  work  to  present  to  the  reader  in  the  first  four 
books  only  such  a  body  of  doctrine  as  is  generally  accepted  by  all  economic 
reasoners  who  have  completely  mastered  the  subject,  and  thus  to  avoid 
breaking  the  current  of  thought  by  arguments  and  discussions  on  contro- 
verted points.  But  the  theory  of  the  employment  of  labor  which  has  been 
presented  in  the  preceding  chapters  may  form  an  exception  to  this  rule. 
This  theory  is,  in  one  point,  in  apparent  discord  with  certain  views  held 
by  the  best  economic  reasoners  of  the  time.  This  discord  can  be  settled 
only  by  a  very  careful  analytic  comparison  of  the  hypotheses  and  conclu- 
sions of  the  two  theories. 

The  gist  of  the  view  which  has  been  laid  down  in  the  present  work  is  this : 
That,  so  far  as  the  current  rate  of  wages  and  the  immediate  interests  of 
society  at  large  are  concerned,  it  makes  little  or  no  difference  whether  the 
owner  of  money  expends  it  in  one  direction  or  another;  and  that  the  real 
point  on  which  the  remote  interests  turn  is  whether  the  spender  employs 
his  money  for  an  object  terminating  in  his  own  gratification,  or  in  an  ob- 
ject involving  an  increase  in  the  wealth  which  can  be  commanded  by  society 
at  large.  As  special  examples: 

I.  If  the  manufacturer  of  cloth  buys  wool  and  other  materials  with  a  view 
of  enlarging  his  production;  if  a  farmer  buys  manure  to  increase  the  fer- 
tility of  his  field,  or  a  plough  and  team  of  horses  to  cultivate  a  new  field, 
then  he  will  ultimately  benefit  society  by  placing  at  its  disposal  a  larger  or 
better  supply  of  cloth  and  wheat. 

II.  If  I  employ  men  as  outriders  for  my  carriage,  or  servants  to  wait  upon 
me,  I  render  no  benefit  to  society,  but  leave  the  account  even.     But  if  I  em- 
ploy these  men  in  making  cloth  or  raising  wheat,  then  I  benefit  the  rest  of 
society  by  placing  at  its  disposal  larger  or  better  supplies  of  food  or  clothing. 

III.  If  I  have  been  in  the  habit  of  spending  a  thousand  dollars  of  my  in- 
come annually  in  clothing  myself  in  fine  velvet,  and  I  change  my  mode  of 
expenditure  by  giving  up  the  velvet  and  spending  the  money  in  paying  a 
man  to  sing  and  dance  for  me,  I  merely  change  the  direction  of  a  certain 
portion  of  the  industry  of  the  country  from  the  work  of  making  velvet  to 
the  work  of  dancing  for  me,  and  the  interests  of  society  at  large  remain  un- 
affected by  the  change. 

The  other  theory,  which  is  not  necessarily  in  opposition  to  the  above 
views,  but  which  is  often  supposed  to  be,  is  very  fully  developed  by  Mr. 
John  Stuart  Mill,  in  his  Political  Economy,  Rook  I.,  Chapter  V.,  §9,  and 
also  by  Mr.  J.  L.  Laughlin,  in  his  abridged  edition  of  Mill,  pp.  87-92.  It 
is  embodied  in  the  maxim  that  "a  demand  for  commodities  is  not  a  de- 
mand for  labor."  "We  must  understand  the  meaning  and  application  of 
this  maxim  before  we  can  make  any  comparative  analysis  of  it.  Taken 


DEMAND  FOR  COMMODITIES,  ETC.  435 

literally  it  is  undoubtedly  correct,  as  has  in  fact  already  been  shown. 
Buying  things  does  not  make  them.  When  the  ownership  of  a  great 
factory  is  transferred  from  one  company  to  another,  the  conditions  of  pro- 
duction are  in  no  wise  altered.  The  producing  ability  of  society  at  large  is 
the  same  after  a  bale  of  goods  has  been  sold  as  it  was  before.  All  that 
mere  buying  and  selling  consists  in  is  the  transfer  of  rights,  powers,  and 
duties  from  one  person  to  another,  and  not  the  production  of  such  rights, 
powers,  or  duties. 

Has  this  fact  any  necessary  antagonism  to  the  theory  which  has  been 
laid  down?  I  think  not.  It  is  rather  certain  corollaries  drawn  from  it  that 
are  in  antagonism  to  it,  and  it  is  with  these  corollaries  and  not  with  the 
maxim  itself  that  we  shall  be  concerned. 

If  we  regard  the  theory  as  a  complete  one,  which  some  economists  do, 
then  the  question  whether  one  does  or  does  not  benefit  labor  by  his  expen- 
diture turns  entirely  upon  whether  he  purchases  goods  or  employs  labor, 
and  does  not  depend  upon  the  kind  of  goods  he  purchases  or  the  work 
which  he  employs  the  laborers  to  do.  Now, this  conclusion  admits  of  a  very 
easy  reductio  ad  absurdum.  The  farmers  of  the  country  employ  a  great  body 
of  laborers  every  winter,  spring,  and  summer  in  sowing,  cultivating,  and 
harvesting  crops.  If  we  conclude  that  the  main  question  is  not,  "What 
shall  we  employ  our  laborers  in  doing  ?  "  let  us  suppose  tbat  the  farmers 
employ  them  as  liveried  servants  to  drive  their  carriages  and  wait  on  table, 
leaving  all  the  crops  unharvested.  It  is  perfectly  clear  that  society  at 
large  will  suffer  by  such  a  policy.  It  must  be  therefore  that  some  other 
question  than  that  of  ' '  demand  for  labor  versus  demand  for  commodities  " 
comes  into  play. 

This  reductio  ad  absurdum  proves  that  the  theorem  is  not  complete,  but 
does  not  disprove  it  in  all  its  applications.  The  direct  issue  between  the 
two  applications  may  be  seen  in  the  following  propositions.  The  doctrine 
of  the  present  work  is: 

If,  in  lieu  of  clothing  myself  with  fine  velvet,  I  expend  the  same  income  in 
paying  a  man  to  dance  for  me  the  year  round,  I  merely  change  a  certain 
amount  of  the  industry  of  the  country  from  the  work  of  making  velvet  to  the 
work  of  dancing,  and  the  interests  of  society  at  large  are  unaffected  by  the 
change. 

The  opposing  reply  of  Mr.  Mill  is:  No,  you  do  more  than  this  :  you  trans- 
fer a  certain  portion  of  your  consuming  power  from  yourself  to  the  dancer; 
and  you  direct  a  certain  portion  of  the  industry  of  the  country  from  the  work 
of  supplying  yourself  with  velvet  to  that  of  supplyiny  your  dancer  with  food. 
You  thus  confer  a  positive  benefit  upon  society  at  large  by  increasing  the  manu- 
facture of  food  in  compensation  for  which  you  have  given  up  wearing  velvet. 

The  comparison  of  these  opposing  views  requires  us  to  enter  upon  some 
minute  and  somewhat  intricate  considerations.  There  is  a  certain  advan- 
tage in  the  direct  employment  of  the  dancer,  inasmuch  as  he  gets  the  entire 
benefit  of  my  expenditure,  whereas,  when  I  buy  the  velvet,  the  great  armies 


.j:V,  THE  SOCIETARY  CIRCULATION. 

of  men  who  were  directly  or  indirectly  engaged  in  producing  that  velvet  do 
not  get  all  the  benefit  of  my  money,  because  a  certain  portion  of  it  is  absorbed 
in  the  cost  of  making  the  numerous  exchanges  which  have  come  into  play. 
Therefore,  could  we  do  away  with  the  labor  of  exchange,  we  might  employ 
the  men  now  engaged  in  buying  and  selling  in  the  sole  labor  of  producing, 
and  thus  society  at  large  would  be  a  gainer.  Thus,  in  so  far  as  labor  of 
exchange  is  saved,  Mr.  Mill's  view  has  a  certain  amount  of  correctness. 

But  practically  can  we  make  any  alterations  in  the  ratio  of  the  number 
of  men  engaged  in  actual  production  to  those  engaged  in  exchange?  Prac- 
tically no  such  saving  iu  exchange  appears  to  be  possible.  The  proportion 
of  the  community  which  has  to  be  engaged  in  the  work  of  exchange  is  fixed 
by  the  conditions  of  the  country  and  of  trade,  and  cannot  be  altered  on 
any  considerable  scale. 

Returning  now  to  the  main  question,  we  have  to  begin  by  recalling  sev- 
eral preliminary  propositions,  which  must  be  accepted  by  all  who  really 
understand  the  case,  and  which  we  shall  therefore  not  stop  to  establish. 

I.  The  typical  laborer  is  one  who  has  not  accumulated  any  considerable 
amount  of  wealth  for  himself,  and  must  therefore  depend  for  his  support 
upon  the  capital  of  others  who  pay  him  for  his  services. 

II.  The  wages  which  he  receives  may  all  be  expressed  in  terms  of  food, 
clothing,  and  shelter,  for  which  we  may  use  the  general  term  sustenance.     If 
he  is  paid  in  money,  we  may  regard  this  money  as  an  order  on  society  to 
supply  the  laborer  from  its  storehouse  with  the  equivalent  of  the  money  in 
sustenance.     Thus  the  laborer  is  to  be  regarded  as  an  agent  producing  sus- 
tenance and  at  the  same  time  consuming  it. 

III.  The  benefit  of  his  labor  to  society  at  large,  and  especially  to  other 
laborers,  depends  upon  his  producing  for  other  laborers  an  amount  of  sus- 
tenance equal  or  superior  in  quantity  or  quality  to  that  which  he  himself 
consumes.    That  is,  as  he  eats  his  daily  bread  and  wears  out  his  clothes, 
and  as  the  house  in  which  he  lives  is  going  to  decay,  he  must  by  his 
labor  produce  more  than  an  equivalent  in  some  form  of  clothing,  food,  or 
houses  for  his  fellow-laborers. 

IV.  We  can  therefore  measure  the  benefits  rendered  to  laborers  at  large 
by  any  economic  cause  by  determining  whether  that  cause  results  in  a 
greater  production  of  sustenance  for  laborers. 

The  counter-proposition  of  Mr.  Mill  is  now  tested  by  considering  the 
relative  situations  and  activities  of  the  spender  of  money,  and  the  maker 
of  velvet  or  body  of  makers,  and  a  dancer  or  body  of  dancers,  in  the  follow- 
ing way: 

We  have  a  first  agent  A  (Fig.  8),  comprising  a  body  of  men  who  receive 
the  stream  a  from  society  and  have  been  spending  it  upon  fine  velvet  bought 
from  the  velvet  maker  V  with  the  equal  stream  b.  The  velvet-maker  V  has 
a  capital,  and  a  body  of  operatives  to  whom  he  pays  the  stream  of  wages  c. 
The  stream  d  purchases  subsistence  for  the  operatives. 

A  time  now  comes  when  A  gives  notice  to  V  that  after  his  present  orders 


DEMAND  FOR  COMMODITIES,  ETC. 


437 


are  filled  he  will  want  no  more  velvet,  and  in  lieu  of  spending  bis  money  on 
velvet  he  will  spend  it  on  men  to  dance  for  him.  To  make  the  cases  in  every 
respect  equal,  we  may  assume  that  he  will  want  a  theatre  equal  in  value 
to  V's  fixed  capital,  and  that  V  can  transform  his  capital  into  the  required 
theatre.  Such  are  the  fundamental  hypotheses  common  to  the  two  theories. 
Now,  according  to  the  view  laid  down  in  this  book,  the  result  of  this  action 
on  A's  part  will  be  that  V  will  say  to  his  men :  "  The  demand  for  velvet  will 
cease ;  I  can  therefore  no  longer  employ  you  in  making  velvet.  But  A,  my 
customers,  will  want  dancers;  I  am  going  to  build  them  a  theatre,  and  you 
can  dance  for  them  at  the  same  wages  I  have  been  paying  you."  The  result 
will  be  that  shown  in  Fig.  9.  A  receives  the  same  monetary  flow  a,  from 


Dancers]  Q 


FIG.  8. 


Fro.  9. 


society.  He  pays  one  flow  to  V,  the  former  velvet-maker  (now  a  manager 
of  his  theatre),  and  another  to  a  body  of  dancers  who  were  formerly  opera- 
tives. Thus  the  sole  change  is  that  V  and  all  his  operatives  have  gone  out 
of  the  business  of  making  velvet  into  that  of  dancing.  Society  at  large  is 
unaltered  by  the  change,  whichever  way  it  occurs,  because  all  it  knows  of 
the  matter  is  that  it  supplied  food  to  the  total  number  of  operatives  em- 
ployed by  V,  and  when  they  take  to  dancing,  the  supply  and  the  money 
they  pay  for  it  remains  just  the  same  as  before. 

According  to  Mill's  view,  the  change  in  A's  expenditure  will  work  in  this 
way:  When  A  advises  V  that  he  is  going  to  stop  wearing  velvet,  V  will  say 
to  his  operatives:  "  I  can  no  longer  employ  you  in  making  velvet,  because 
the  men  A  who  have  been  buying  my  velvet  arc  going  to  stop  wearing  it. 
But  these  men  arc  going  to  employ  dancers  to  dance  for  them,  and  those 
dancers  will  want  sustenance.  Therefore,  instead  of  employing  you  in 
making  velvet  for  A,  I  am  now  going  to  employ  you  in  making  sustenance 
for  A's  dancers."  In  other  words,  the  velvet-makers,  instead  of  responding 
to  A's  demand,  "We  want  dancers,"  will  respond  to  the  demand  of  his 
dancers,  "  We  want  sustenance." 


438  TUB  SOC1ETART  CIRCULATION. 

This  supposed  state  of  things  is  represented  in  Fig.  10.  The  stream  o, 
instead  of  passing  from  A  through  V  and  O  tp  society,  as  in  Fig.  8,  now 
passes  from  A  to  D  in  payment  for  dancing.  Thence  it  passes  from  D  to 
O  in  payment  for  the  sustenance  which  V  and  O  are  now  making,  and  from 
this  poiut  we  have  the  same  draft  on  society  as  before. 

Mr.  Mill's  conclusion  is  that  a  certain  portion  of  the  industry  of  the 
country  performed  by  V  and  O  has  been  changed  from  the  work  of  making 
velvet  to  the  work  of  making  sustenance  for  D.  Thus  the  production  of  sus- 
tenance is  increased,  and  thus,  in  accordance  with  the  principles  laid  down, 
laborers  are  benefited.  Thus  we  have  two  apparently  contradictory  results 
well  made  out,  of  which  only  one  can  be  really  true.  Which  is  true?  Are 
we  to  regard  Fig.  8  as  changed  into  Fig.  9  or  into  Fig.  10? 

A  very  little  consideration  will  show  us 
one  essential  difference.  In  Fig.  9  we  are 
dealing  with  absolutely  the  same  body  of 
persons  as  in  Fig.  8,  namely,  a  spender  or 
body  of  spenders  A,  a  body  of  velvet-mak- 
ers V  and  O,  and  society. 

Thus  the  comparison  is  made  with  the 
game  persons. 

Now,  supposing  Fig.  8  to  change  into 
Fig.  10,  we  bring  into  consideration  a  new 
body  of  men,  D.  Now,  A  did  not  make 
these  men  on  the  spot  to  dance  for  him; 
and  even  if  he  could  do  so,  society  would 
not  ke  benefited,  because  the  streams  to 
and  from  society  are  precisely  the  same  in 

Fig.  10  as  in  Fig.  8.  Very  clearly,  before  we  can  decide  whether  Fig.  10  is 
more  favorable  to  society  at  large  than  Fig.  9,  we  must  know  what  these  men 
D  were  doing  in  Fig.  8.  It  is  at  this  point  that  the  writer  takes  exception  to 
Mill's  theory.  It  withdraws  from  society  and  brings  upon  the  scene  a  new 
body  of  men,  D,  and  at  the  same  time  brings  in  an  increase  of  subsistence 
for  the  support  of  these  men.  It  therefore  proves  nothing.  We  can  con- 
clude nothing  until  we  know  what  the  men  D  were  doing  in  Fig.  8,  where 
they  form  a  part  of  society.  Now,  we  may  make  two  hypotheses — that 
they  were  employed  in  Fig.  8,  or  that  they  were  for  the  time  being  unem- 
ployed. If  we  take  the  most  popular  hypothesis,  we  shall  undoubtedly 
suppose  them  to  be  unemployed. 

There  are  constantly  in  the  whole  country  a  body  of  unemployed  men, 
ranging  from  a  few  thousand  to  perhaps  half  a  million,  or,  we  may  say,  one, 
two,  or  three  per  cent  of  the  whole  population.  The  popular  economy 
holds  these  men  up  to  view  and  informs  us  that  if  we  will,  by  increasing  the 
volume  of  the  currency  or  taking  some  other  measures,  find  employment 
for  them,  all  will  be  well;  and  it  tacitly  assumes  that  thereafter  nobody  will 
be  out  of  employment.  As  a  matter  of  fact  we  have  shown  that  this  body 


DEMAND  FOR  COMMODITIES,  ETC.  439 

of  unemployed  men  is  of  the  same  general  magnitude,  and  subject  to  the 
same  kind  of  fluctuations,  no  matter  what  system  we  adopt,  and  that  it  is 
inseparable  from  the  ordinary  fluctuations  in  production  and  consumption. 
We  cannot  therefore  look  upon  D  as  representing  a  permanently  unem- 
ployed class  to  whom  we  have  given  permanent  employment.  All  we  have 
done  is  to  take  out  of  society,  in  imagination,  a  body  of  men  D,  and  thus 
to  deprive  society  both  of  their  producing  and  consuming  powers.  Their 
consumption,  which  formerly  came  from  society,  now  comes  from  V;  that 
is,  the  increased  amount  of  food  produced  by  V  is  the  economic  equivalent 
of  the  sustenance  which  D  produced  when  a  part  of  society  as  in  Fig.  8.  We 
have  simply  changed  the  occupation  of  D  from  that  of  production  in  general 
to  dancing,  and  the  occupation  of  V  and  O  from  that  of  producing  velvet 
to  that  of  producing  sustenance.  Thus  the  interests  of  society  at  large  re- 
main unaltered. 

It  therefore  appears  that  the  logical  conclusions  are  the  same  even  when 
we  adopt  Mr.  Mill's  theory  of  the  change.  It  is  therefore  unnecessary  to 
decide  whether  the  outcome  of  the  change  is  represented  by  Fig.  9  or 
Fig.  10. 

The  case  of  Fig.  10  illustrates  the  way  in  which  Mr.  Mill  and  his  dis- 
ciples prove  their  theory.  They  bring  upon  the  stage  a  body  of  unem- 
ployed men  and  show  that  though  these  men  should  be  surrounded  by  a 
crowd  of  customers  crying,  "We  want  velvet,"  "  We  demand  such  food  as 
you  know  how  to  make,"  and  offering  them  money  for  the  velvet  and  the 
food,  yet  this  demand  would  not  be  of  the  slightest  use  to  the  men,  who 
could  be  employed  only  by  some  one  offering  them  wages  to  go  to  work, 
and  finding  the  necessary  capital  for  that  purpose. 

If  this  is  true  and  obvious,  as  of  course  it  is,  why  devote  so  much  atten- 
tion to  refuting  the  deductions  from  it?  I  reply,  because  the  fact  is  falla- 
ciously used  to  set  aside  one  of  the  most  fundamental  principles  of  eco- 
nomics. A  single  example  will  suffice.  It  was  shown  in  Chapter  VIII., 
preceding,  that  labor-saving  machinery  cannot  diminish  the  sum  total  of 
demand  for  labor,  because  all  the  money  saved  goes  into  the  market  to 
purchase  other  products  of  labor.  Mr.  Mill  says  of  this  theory: 

"This  is  plausible,  but  involves  a  fallacy;  a  demand  for  commodities 
being  a  totally  different  thing  from  demand  for  labor.  It  is  true,  the  con- 
sumers have  now  additional  means  of  buying  other  things;  but  this  will  not 
create  the  other  things,  unless  there  is  capital  to  produce  them,  and  the  im- 
provement has  not  set  at  liberty  any  capital,  even  if  it  has  not  absorbed 
some  from  other  employments.  The  supposed  increase  of  production  and 
of  employment  for  labor  in  other  departments  therefore  will  not  take 
place;  and  the  increased  demand  for  commodities  by  some  consumers  will 
be  balanced  by  a  cessation  of  demand  on  the  part  of  others,  nameiy,  the 
laborers  who  were  superseded  by  the  improvement,  and  who  will  now  bo 
maintained,  if  at  all,  by  sharing,  either  in  the  way  of  competition  or  of 
charity,  in  what  was  previously  consumed  by  other  people." 


440  TnE  SOCIETART  CIRCULATION. 

Any  one  who  1ms  mastered  the  theory  of  the  demand  for  labor  set  forth 
in  Chapter  VI.,  ante,  should  be  able  to  grapple  with  what  seems  to  the 
writer  a  totally  groundless  conclusion.  It  is  true  that  the  act  of  buying 
commodities  with  the  money  saved  by  the  machinery  does  not,  in  itself, 
employ  labor.  But  it  transfers  the  employing  power  to  the  seller  of  the 
commodities,  and,  even  if  the  latter  transfers  it  to  another,  it  must  after  a 
very  few  transfers  reach  laborers  ns  wages,  and  then  the  result  is  the  same 
as  if  the  saver  had  employed  labor  with  it  in  the  first  place. 

Mr.  Mill's  reasoning  in  fact  seems  to  involve  the  conclusion  that  if  the 
crowd  of  men  whom  we  have  pictured  as  surrounding  the  unemployed 
laborers  and  crying  for  velvet  which  they  could  not  furnish  should  go  to  all 
the  velvet  manufacturers  within  reach,  and  buy  out  for  cash  all  their  stock 
on  hand,  as  well  as  give  them  orders  at  double  prices  for  all  they  could 
make  during  the  next  year,  that  course  would  not  give  employment  to  one 
of  the  unemployed  men.  No  matter  how  fabulous  the  sums  offered  and 
paid  by  the  men  hungry  for  velvet,  their  demand  is  only  for  a  commodity, 
and  therefore  does  not  set  free  any  new  capital  for  the  use  of  the  velvet- 
makers,  and  so  the  latter  cannot  employ  any  new  men. 


BOOK  V. 


OP 


ECONOMIC     SCIENCE 


BOOK  V.— APPLICATIONS    OF  ECONOMIC 
SCIENCE  TO   QUESTIONS  OF  POLICY. 


CHAPTER  I. 

THE   LET-ALONE   PRINCIPLE. 

1.  MOST  questions  of  governmental  policy  cluster  around 
one  central  maxim,  founded  on  what  is  sometimes  called  the  let- 
alone  principle.  This  maxim  was  enunciated  by  the  Physio- 
crates,  a  school  of  French  economists  and  philosophers  which 
arose  early  in  the  last  century.  Its  familiar  form  was,  Laissez- 
atter,  laissez-faire  /  which  may  be  freely  paraphrased,  "  Let 
things  take  their  own  course."  It  was  directed  against  the  sys- 
tem, which  was  then  almost  universal,  of  governmental  inter- 
ference with  the  freedom  of  intercourse  between  nations 
and  individuals.  It  opened  up  a  new  line  of  thought,  founded 
on  the  consideration  that  the  individual  man  was  a  being  better 

o 

able  to  take  care  of  himself,  in  bargaining  with  his  fellow-men, 
than  any  government  was  to  take  care  of  him.  We  have  to 
consider  what  the  maxim  means,  on  what  grounds  it  rests,  to 
what  limitations  it  is  subjected,  and  what  are  its  relations  to 
the  progress  of  society. 

Since  the  maxim  is  directed  against  interference  of  govern- 
ment with  the  individual,  we  must  begin  by  considering  the 
relations  of  these  two  parties.  "We  may  consider  government 
in  this  case  as  the  instrument  for  the  combined  action  of  society 
at  large.  Thus  the  relation  of  the  individual  to  government 
means  his  relation  to  society ;  that  is,  to  all  his  fellow-men.  In 
this  connection  we  must  remember  that  society  can  be  nothing 


444  APPLICATIONS  OF  ECONOMIC  SCIENCE.  [V.  2. 

more  than  an  aggregate  of  individuals,  and  can  have  no  inter- 
ests separate  from  the  interests  of  individuals.  It  would  be  a 
contradiction  in  terms  to  talk  about  a  society  which  was  weal  thy 
and  prosperous  while  its  individual  members  were  poor  and 
starving. 

We  may  consider  the  maxim  as  expressing  either  a  policy 
or  a  principle.  Considered  as  a  policy  it  claims  that  govern- 
ment should  not  interfere  with  the  rights  of  individuals,  or  bodies 
of  individuals,  to  direct  their  industry  into  such  channels  as  they 
may  deem  best,  and  to  make  such  contracts  with  their  fellow- 
men  as  they  may  deem  mutually  advantageous.  The  principle 
or  law  embodied  in  the  policy  is  that  non-interference  on  the 
part  of  the  government  is  best  for  the  progress  of  society,  so 
far  at  least  as  the  operations  of  its  wealth-producing  powers  are 
concerned.  These  two  views  of  the  maxim  are  practically 
equivalent,  because  it  is  only  on  grounds  of  general  good  that 
government  can  be  required  to  abstain  from  interfering,  and 
thus  the  principle  and  the  policy  necessarily  go  together. 

2»  Economic  Significance  of  Laissez-faire.  Like  all  other 
very  general  principles  in  social  science,  the  let-alone  principle 
may  have  a  very  wide  range  of  meanings  and  applications.  In 
order  to  treat  it  definitely  it  is  necessary  to  distinguish  between 
these  applications,  and  to  find  in  what  its  economic  significance 
consists.  Taken  in  its  widest  possible  range,  it  is  sometimes 
interpreted  as  meaning  that  every  man  should  always  be  at 
liberty  to  do  as  he  pleases.  But  it  is  evidently  impossible  that 
he  should  enjoy  this  liberty.  He  might  want  to  fly,  but  he 
cannot  do  it.  His  liberty  is  necessarily  limited  by  the  condi- 
tions which  surround  him. 

The  first  class  of  limitations  are  those  imposed  by  the  physi- 
cal necessities  of  the  case.  Two  men  cannot  exist  in  the  same 
place  at  the  same  time.  They  cannot  eat  the  same  loaf  of 
bread.  Practically  a  man  cannot  wholly  rid  himself  of  the 
society  of  his  fellows. 

Yet  further  limitations  are  imposed  by  the  mutual  and  equal 


V.  2.]  THE  LET-ALONE  PRINCIPLE.  445 

rights  of  men.     One  man  cannot  be  allowed  to  assault  another, 

O  7 

however  much  he  might  like  to  do  it.  The  sufferer  from  a 
contagious  disease  will  be  quarantined  or  isolated  by  his  fellow- 
men.  One  man  is  not  going  to  allow  his  neighbor  to  erect  an 
inflammable  house  adjoining  his  own,  or  to  suffer  nitro-glyce- 
rine  to  be  stored  in  his  cellar. 

Again,  there  are  certain  generally  recognized  necessities  of 
society  which  lead  governments  to  demand  certian  duties  from 
their  citizens.  Of  these  the  most  important  is  the  payment  of 
the  taxes  necessary  to  the  public  support.  In  most  countries 
this  includes  a  contribution  to  the  education  of  the  rising  gen- 
eration. In  case  of  war  every  male  citizen  may  be  required 
to  bear  arms  against  the  enemies  of  his  country. 

The  above  three  limitations  upon  the  let-alone  principle  have 
little  relation  to  economic  questions.  The  burning  question 
of  the  day,  in  applying  economic  principles  to  governmental 
policy,  is  whether  any  economic  advantage  can  be  gained  by 
government  interference  with  the  liberty  of  the  individual.  If 
we  strictly  limit  our  question  in  this  way,  we  shall  exclude  some 
questions  which  the  economist  often  discusses.  One  of  these 
is  that  of  limiting  the  employment  of  children  in  factories. 
Legislation  to  effect  this  object  has  been  opposed  by  economists. 
If  the  purpose  of  the  legislation  had  been  the  increase  of  wealth, 
the  ground  taken  by  the  economist  might  have  been  sound. 
As  a  matter  of  fact,  however,  the  purpose  was  the  general  good 
of  society  in  the  future,  which  is  not  a  purely  economic  ques- 
tion, and  therefore  cannot  be  treated  from  a  purely  economic 
point  of  view.  Owing  to  the  confusion  which  often  arises 
from  not  keeping  in  sight  the  distinction  here  indicated,  we 
shall  define  it  precisely : 

An  economic  question  is  one  whose  issue  concerns  only 
wealth  and  its  enjoyment,  including  the  power  of  each  individ- 
ual to  gain  the  maximum  amount  of  gratification  from  his  labor. 
When  other  subjects  are  involved  in  the  question,  it  ceases  to 
be  a  purely  economic  one,  and  therefore  an  answer  founded 
solely  on  economic  considerations  may  not  be  conclusive. 


446  APPLICATIONS  OF  ECONOMIC  SCIENCE.  [V.  3. 

3.  Wo  may  continue  our  examination  of  the  principle  by 
correcting  a  misapprehension  concerning  it.  It  is  very  com- 
monly considered  as  a  policy  invented  by  the  economists,  and 
of  doubtful  applicability;  sometimes,  indeed,  as  a  mere  ab- 
straction to  which  it  is  impossible  to  give  a  definite  shape. 

On  the  contrary,  the  maxim  merely  expresses  a  fundamental 
law  on  which  civilized  society  is  organized,  and  one  which,  un- 
der certain  limitations  to  be  hereafter  considered,  is  obeyed  in 
most  of  the  internal  relations  of  all  civilized  communities.  In 
practice  every  civilized  community  allows  each  of  its  members 
to  engage  in  any  occupation  he  chooses,  and  to  make  any  bar- 
gains with  his  fellow-men  which  he  deems  just,  so  long  as  he 
does  not  interfere  with  their  equal  rights.  It  is  on  this  baais 
of  individual  freedom  that  the  whole  fabric  of  modern  society 
is  erected.  All  that  the  economists  did  was  to  state  and  point 
out  the  principle,  and  to  claim  for  it  a  wider  range  than  had 
formerly  been  allowed  it. 

The  most  common  argument  against  this  view  is  this:  In 
early  and  primitive  forms  of  society,  when  population  is  sparse, 
governments  weak,  and  each  man  under  the  necessity  of  pro- 
tecting himself,  the  principle  may  well  apply.  But  as  civiliza- 
tion develops,  and  population  becomes  denser,  the  relations  of 
the  individual  to  society  become  so  intimate  that  he  has  to  give 
up  more  and  more  of  his  natural  rights,  until  he  has  so  few 
left  that  it  is  not  worth  while  to  consider  them. 

This  argument  is  founded  on  a  complete  misapprehension  of 
the  facts  of  the  case.  The  let-alone  principle,  as  a  principle,  is 
quite  modern ;  and  as  a  policy  it  is  almost  entirely  a  growth  of 
modern  times.  Until  within  two  centuries  there  was  no  wide- 
spread idea  of  the  individual  having  any  rights  simply  as  a  hu- 
man being.  He  was  born  a  citizen  of  some  country,  or  a  sub- 
ject of  some  king,  and  was  allowed  such  rights  at  home  as  law 
or  custom  sanctioned.  But  if  he  left  his  country,  it  was  only  as 
civilization  advanced  that  any  rights  at  all  were  conceded  him. 

One  illustration  will  make  this  plain.  To-day  a  person  with 
money  enough  to  pay  his  way  can  travel  around  ths  world, 


V.  4.]  TEE  LET-ALONE  PRINCIPLE.  447 

coming  into  contact  with  thousands  of  men  without  meetin» 

«D  O 

any  one  to  challenge  him,  or  to  demand  whence  he  comes, 
whither  he  goes,  or  why  he  is  not  attending  to  his  affairs  at 
home.  Two  or  three  thousand  years  ago  he  could  not  have 
travelled  through  Europe  without  being  threatened  at  every 
step  with  robbery,  imprisonment,  slavery,  or  death. 

The  fact  is  that  although,  with  the  progress  of  society,  gov- 
ernment has  within  its  sphere  grown  more  powerful  and  effi- 
cient, this  sphere  has  not  been  greatly  enlarged.  But  the 
sphere  of  individual  activity  has  greatly  enlarged,  and  with 
the  spread  of  knowledge  the  individual  has  become  better  able 
to  maintain  his  rights  against  society,  and  governments  are  be- 
coming less  and  less  able  to  manage  him.  Let  us  look,  for  ex- 

O  O  7 

ample,  at  such  great  public  works  of  antiquity  as  the  pyramids 
of  Egypt,  and  think  how  large  a  proportion  of  the  laboring 
energies  of  the  nation  which  erected  these  structures  could  be 
commanded  by  its  ruler.  "We  shall  then  see  that  although 
civilized  governments  of  the  present  day  could  undertake  works 
equally  great,  they  could  not  command  the  same  proportion 
of  the  labor-power  of  the  people.  The  labor-power  of  the  na- 
tion has  increased  many-fold,  but  the  proportion  of  that  power 
which  government  can  command  has  diminished  in  a  nearly 
equal  degree. 

4.  The  Grounds  of  the  Let-alone  Maxim.  These  grounds 
are  briefly  as  follows : 

I.  Tlie  Ground  of  Right.  In  the  conscience  of  every  civil- 
ized man  there  is  a  feeling  that  he  has  the  exclusive  right  to 
the  use  of  his  own  faculties,  and  that  society  at  large,  that  is, 
his  fellow-men,  should  not  interfere  with  his  actions  so  long  as 
he  does  not  interfere  with  theirs.  The  recognition  of  this 
right  in  each  individual  carries  with  it  the  right  of  any  two  or 
more  individuals  to  make  such  bargains  as  they  may  deem  best 
for  their  interests.  For  example,  if  a  farmer  deems  it  to 
his  advantage  to  borrow  money  from  a  capitalist  at  twelve 
per  cent  interest,  and  government  comes  in  with  a  law  that 


448  APPLICATIONS  OF  ECONOMIC  SCIENCE.  [V.  4. 

no  one  shall  loan  money  at  a  higher  rate  than  six  per  cent,  thus 
compelling  the  farmer  to  go  without  the  money,  and  the  cap- 
italist to  seek  some  less  profitable  investment,  this  is  an  inter- 
ference with  the  natural  rights  of  both  parties  to  make  their 
own  bargains. 

It  may  be  objected  to  this  claim  of  right  that  after  all  it 
amounts  to  nothing,  because  it  is  of  no  practical  use  for  one  to 
claim  a  right  which  he  cannot  persuade  or  force  others  to  re- 
spect. The  reply  to  this  is  that  we  may  call  it  a  power  as  well 
as  a  right.  As  a  matter  of  fact  the  civilized  man  can  and  does 
enforce  the  right  we  have  described  in  nearly  all  the  every-day 
relations  of  life.  As  a  general  rule  the  adult  man  can  and  does 
use  his  faculties  as  lie  pleases,  so  long  as  he  refrains  from  inter- 
ference with  the  rights  of  other  men  to  use  their  faculties  as  they 
please.  The  only  cases  in  question  are  therefore  exceptional 
ones,  and  the  maxim  then  amounts  to  the  assertion  that  gov- 
ernment, or  society  at  large,  if  we  choose  so  to  consider  it,  has 
no  right  to  exercise  and  claim  a  power  in  cases  which  are  ex- 
ceptional, and  where  the  exercise  of  the  power  is  merely  vexa- 
tious. 

II.  As  a  matter  of  policy,  the  let-alone  principle  is  support- 
ed on  the  ground  that  the  processes  of  production  and  distri- 
bution are  conducted  in  the  most  advantageous  manner  when 
left  to  the  management  of  individuals,  each  of  whom  seeks  only 
his  own  interest.  If  a  railway  is  to  be  built,  self-interest  will 
prompt  its  projectors  to  make  it  connect  those  points  and  follow 
that  line  where  it  is  most  wanted,  because  there  people  will 
pay  highest  for  its  use.  If  the  public  want  an  article,  that  fact 
will  stimulate  its  manufacture.  If  the  makers  charge  too  much 
for  it,  other  makers  will  compete  and  thus  lower  the  price. 
The  prices  of  any  class  of  goods  are  highest  where  the  goods 
are  most  wanted,  and  lowest  where  they  are  least  wanted.  Thus 
the  self-interest  which  prompts  traders  to  buy  in  the  cheapest 
and  sell  in  the  dearest  market  prompts  them  to  do  what  is  best 
to  satisfy  the  wants  of  the  public.  If  an  enterprise  does  not 
pay  its  projectors,  that  fact  shows  that  it  does  not  confer  upon 


V.  5.]  TEE  LET-ALONE  PRINCIPLE.  449 

the  public  a  benefit  sufficient  to  compensate  for  the  capital  and 
labor  bestowed  upon  it.  In  general,  since  no  man  is  required 
to  do  anything  which  is  not  to  his  advantage,  no  bargains  will 
be  made  except  such  as,  in  the  judgment  of  the  parties,  will 
benefit  both. 

• 

5.  Criticism  and  Defence  of  the  Let-alone  Policy.  If  we 
consider  the  preceding  argument  as  valid  in  its  widest  and 
most  unrestricted  application,  we  shall  see  that  it  rests  upon 
two  tacit  assumptions,  namely : 

1.  That  things  are  to  be  considered  good  in  proportion  to 
the  desire  of  people  to  have  them.     In  other  words,  govern- 
ment need  have  no  other  standard  to  decide  whether  an  end 
is  good  for  society  than  the  willingness  of  men  to  labor  for 
the  attainment  of  that  end. 

2.  That  individuals  are  the  best  judges  of  what  is  for  their 
own  interests. 

Examination  shows  that  there  are,  or  may  be,  many  excep- 
tions to  each  of  these  premises. 

I.  Great  numbers  of  people  desire,  and  are  willing  to  pay 
for,  things  which  are  injurious  both  to  themselves  and  their 
posterity ;  quack  medicines  and  intoxicating  liquors,  for  exam- 
ple. In  such  cases  it  cannot  be  concluded  by  any  single  prin- 
ciple that  government  should  not  interfere  with  the  liberty  of 
the  individual.  As  another  example,  children  may,  with  pe- 
cuniary advantage  to  their  parents,  be  employed  in  a  way 
which  will  injure  their  health  and  cripple  their  mental  and 
physical  development.  It  is  clear  that  we  have  here  a  good 
case  for  governmental  interference. 

To  consider  the  subject  in  a  general  way,  it  is  a  universally 
accepted  principle  that  the  main  duty  of  government  is  to  re- 
strain individuals  from  infringing  upon  the  rights  and  liberties 
of  their  fellow-men.  We  may  extend  this  principle  by  say- 
ing that  it  may  also  be  the  duty  of  government  to  restrain  the 
individual  from  acts  injurious  to  the  morals  of  his  fellows  or 
to  the  general  good  of  posterity. 
29 


460  APPLICATIONS  OF  ECONOMIC  SCIENCE.  [V.  6. 

II.  It  is  not  true  that  the  individual  always  knows  what  is 
best  for  his  own  interests.  This  is  markedly  the  case  with  the 
laboring  classes,  whose  opportunities  for  learning  what  places 
offer  them  the  best  means  of  living  are  very  restricted,  and 
whose  intellectual  inability  to  judge  what  public  action  will 
promote  their  happiness  leads  them  to  form  combinations  in- 
jurious to  themselves.  They  are  liable  to  be  led  into  making 
disadvantageous  contracts  with  employers  who  are  able  to 
overreach  them.  Hence  several  of  the  best  governments,  in- 
cluding that  of  England,  pass  laws  restricting  the  freedom  of 
contract  between  various  classes  of  laborers  and  their  em- 
ployers. 

6.  Limitations  on  the  Preceding  Criticisms.  The  preceding 
criticisms  show  that  the  let-alone  principle  cannot  be  regarded 
as  a  necessary  and  universal  truth,  like  a  theorem  of  geometry. 
But  they  are  insufficient  to  prove  the  principle  entirely  in- 
valid. Consider  first  the  case  in  which  the  government  is 
asked  to  restrain  the  individual  from  doing  what  would  be 
harmful  to  himself  or  his  family.  To  establish  a  case  for 
remedial  legislation,  it  is  not  sufficient  to  show  merely  that  in- 
dividuals use  their  liberty  to  their  own  injury.  Two  other 
propositions  must  also  be  established : 

Firstly.  That  the  individual  can  be  really  restrained,  or  the 
evil  he  does  himself  be  prevented,  by  the  action  of  law. 

Secondly.  That  in  executing  the  proposed  law  other  evils 
equally  great  will  not  follow. 

For  example,  in  considering  legislation  to  prevent  the  evil 
of  drunkenness,  we  must  first  ascertain  whether  such  laws 
really  do  pi-event  the  drunkard  from  getting  liquor,  or,  failing 
in  this,  whether  they  save  young  men  from  being  led  into 
temptation.  Then  we  must  consider  the  rights  of  those  who 
have  legitimate  uses  for  alcoholic  liquors,  and  compare  the 
wrong  done  them  by  prohibitory  laws  with  the  benefit  done 
society  by  preventing  drunkenness. 

In  answer  to  the  second  criticism,  the  question  is  not 


V.  7.]  THE  LET-ALONE  PRINCIPLE.  451 

whether  each  person  is  a  perfect  judge  of  what  is  best  for  his 
own  interests,  but  whether  Congress,  or  society  at  large,  acting 
in  any  way,  is,  practically,  a  better  judge  than  he  is.  Now, 
leaving  out  exceptional  cases,  whatever  we  may  say  of  the  im- 
perfect judgment  of  the  individual,  it  is  certain  that  no  legis- 
lative power  is  a  better  judge  of  what  is  for  his  good  than  he 
is  himself.  No  public  body  can  so  well  judge  whether  an  en- 
terprise will  pay  as  the  men  who  are  to  succeed  or  fail  with  it. 
There  is  a  reason  stronger  than  any  yet  given  why  men  are 
better  judges  of  their  practical  affairs  than  legislative  bodies 
can  be,  which  we  have  already  hinted  at  in  treating  of  scientific 
method.  It  is  an  observed  fact  that  when  a  man  of  good  un- 
derstanding and  fair  business  capacity  enters  upon  any  opera- 
tions or  projects  in  which  his  own  personal  interests  are 
involved,  lie  maintains  throughout  a  clear  conception  of  what 
those  interests  are,  and  of  the  effect  upon  them  of  each  cause 
which  may  come  into  play.  It  is  equally  an  observed  fact 
that  when  such  a  man  studies  the  public  interests,  this 
power  of  seeing  the  effect  of  each  cause  upon  those  inter- 
ests fails  him.  The  reason  of  the  failure  is  not  so  much  a 
mistake  in  estimating  the  effect  of  the  cause  as  the  want  of  a 
clear  idea  what  the  public  interests  really  are.  The  inter- 
ests of  fifty  millions  of  people  form  an  aggregate  so  com- 
plex that  they  cannot  be  grasped  by  the  mind  without  a  con- 
siderable power  of  abstraction ;  that  is,  the  power  of  drop- 
ping out  of  consideration  all  non-essential  conditions  of  the 
problem,  while  keeping  a  firm  grasp  on  all  that  is  essential. 
Now,  this  power  is  not  universally  possessed  by  men,  and  is 
much  rarer  among  men  of  action,  who  control  public  affairs, 
than  it  is  among  scholars. 

7.  Limits  of  Application  of  the  Let-alone  Principle. — The 
Keep-out  Policy.  This  world  in  which  we  are  placed  is  not,  so 
far  as  we  have  discovered,  constructed  upon  a  system  so  simple 
that  we  can  frame  any  universal  laws  for  the  conduct  of  man- 
kind. We  must  therefore  expect  to  find  limits  to  the  applica- 


4,") o  APPLICATIONS  OF  ECONOMIC  SCIENCE.  [V.  7. 

tion  of  all  principles.  As  we  have  hitherto  defined  and 
discussed  the  let-alone  principle,  it  means  only  that  govern- 
ments ought  not  to  interfere  with  the  freedom  of  each 
individual  to  employ  his  own  faculties  in  his  own  way,  and  to 
engage  in  such  enterprises  as  he  may  choose,  so  long  as  he 
does  not  interfere  with  the  equal  rights  of  others.  It  does  not 
deny  to  governments  the  same  right  as  the  individual  to  enter 
into  business  enterprises,  subject  to  the  same  restrictions  as 
individuals.  But  it  is  often  extended  so  as  to  include  the 
doctrine  that  the  functions  of  society  should  be  absolutely 
confined  to  the  protection  of  the  citizen  against  wrong,  and 
that  government  should  not  engage  in  any  business  enterprise 
whatever,  not  even  in  establishing  post-offices  and  carrying  the 
mails. 

It  is  essential  that  the  student  of  the  subject  should  clearly 
understand  the  difference  between  this  proposition  and  that 
of  laissez-faire.  The  one  claims  that  the  government  should 
not  stop  the  citizen  from  acting ;  the  other  that  it  should  not 
act  itself.  For  the  sake  of  clearness  we  shall  call  the  latter 
the  keep-out  principle,  because  it  requires  that  government 
should  keep  out  of  certain  fields  of  action. 

Illustrations.  When  government  undertakes  to  carry  let- 
ters, it  violates  the  keep-out  principle.  But  it  does  not  violate 
the  let-alone  principle  so  long  as  the  business  pays  fer  itself 
and  no  additional  tax  is  necessary  to  carry  it  on.  "When  the 
law  prohibits  any  one  else  from  carrying  letters,  then  it  vio- 
lates the  let-alone  principle. 

When  a  government  issues  notes  to  circulate  as  money,  it 
violates  the  keep-out  principle.  When  it  requires  that  creditors 
shall  accept  these  notes  as  if  they  were  gold  and  silver,  it  violates 
the  let-alone  principle. 

The  establishment  and  support  of  public  schools  is  a  violation 
of  the  keep-out  principle.  It  is  also  a  violation  of  the  other 
principle  to  this  extent :  that  the  money  to  support  the  schools 
must  be  raised  by  taxing  every  individual,  whethei  he  wants 
the  school  or  not. 


V.  8.]  THE  LET-ALONE  PRINCIPLE.  453 

Although  in  the  abstract  all  taxes  are  a  violation  of  the  let- 
alone  principle,  yet,  if  we  are  to  adhere  to  this  principle  as 
closely  as  we  can,  taxation  should  be  levied  only  for  the  needs 
of  government.  Hence  when  taxes  are  levied  merely  to  keep 
people  from  buying  particular  things,  or  to  favor  one  person  at 
the  expense  of  another,  the  principle  is  still  further  violated. 

The  same  principle  is  violated  when  the  law  refuses  to  en- 
force any  contracts  into  which  individuals  have  freely  entered 
for  their  own  mutual  benefit,  and  which  works  no  injury  to 
third  parties.  The  case  is  the  same  when  the  law  construes 
contracts  differently  from  what  the  parties  intended ;  for  ex- 
ample, when  it  admits  that  a  debt  which  the  parties  agreed 
should  be  paid  in  gold  may  be  discharged  by  a  payment  in 
silver  or  paper.  But  it  is  no  violation  to  define  beforehand 
what  shall  be  considered  a  dollar,  to  say  that  it  shall  mean  a 
certain  coin  or  a  certain  piece  of  paper,  provided  always  that 
the  definition  is  applied  only  to  cases  in  which  the  parties 
understood  that  this  was  to  be  the  meaning. 

It  is  no  violation  of  the  let-alone  principle  for  government 
to  compete  with  individuals  in  any  branch  of  trade  or  industry, 
so  long  as  it  does  so  without  loss  to  itself,  and  hence  without 
increase  of  taxation.  But  any  such  action  is  of  course  a  direct 
violation  of  the  keep-out  principle. 

8.  Relative  Applications  of  the  two  Principles.  The  let- 
alone  principle  is  valuable  as  an  expression  of  that  line  of 
policy  which  has  made  modern  society  what  it  is.  But  the 
keep-out  principle  does  not  rest  on  any  such  basis.  We  can- 
not decide  a  priori  what  governments  should  or  should  not  do. 
"We  should  rather  say  that  government  should  undertake  any 
business  which  it  can  undertake  with  advantage  to  the  public 
and  without  doing  injustice  to  individuals.  It  has  been  more 
than  once  questioned  whether  the  post-office  department  should 
open  the  mails  to  anything  but  such  mediums  of  information 
as  letters  and  newspapers.  Some  maintain  that  it  is  no  part 
of  the  business  of  that  department  to  act  as  a  general  carrier, 


APPLICATIONS  OF  ECONOMIC  SCIENCE.  [V.  8 

and  that  such  service  should  be  left  to  express  companies. 
Thev  would  exclude  little  parcels  of  every  kind  from  the 
mails  on  this  abstract  ground  alone,  without  even  inquiring 
whether  the  service  could  be  performed  with  advantage  both 
to  the  government  and  the  public.  Thus  a  great  convenience 
to  people  living  in  remote  regions  would  have  been  denied 
them  on  a  mere  abstraction.  The  correct  ground  to  be  taken 
was  this :  Government  has  undertaken  to  send  conveyances  with 
letters  and  papers  to  every  part  of  the  country,  itself  assuming 
the  risk  of  its  paying.  If  the  additional  cost  of  carrying  mis- 
cellaneous parcels  in  the  same  conveyances  is  compensated  by 
the  additional  revenues  thus  derived,  then  the  work  ought  to 
be  undertaken ;  but  not  in  the  opposite  case. 

A  comprehensive  view  of  the  situation  will  show  that  there 
are  some  services  which  are  not  performed  in  the  best  manner 
when  left  entirely  to  private  enterprise,  because  some  of  the 
conditions  which  insure  good  performance  are  wanting.  This 
is  notably  the  case  with  bank-notes,  railways,  and  telegraphs. 

Bank-notes.  We  have  described  the  evils  suffered  by  leav- 
ing banks  free  to  issue  notes  at  their  own  pleasure.  This  state 
of  things  was  remedied  only  by  governmental  interference. 
Government  first  issued  notes  itself,  prescribed  conditions  on 
which  banks  should  issue  notes,  and  prohibited  the  issue  of  any 
others. 

Railways.  On  the  let-alone  and  keep-out  principles  a  rail- 
way will  be  built  to  a  place  by  some  company  whenever  the 
benefit  will  pay  for  the  outlay.  But  as  a  matter  of  fact  the 
benefit  done  by  the  road  is  always  greater  than  the  amount  it  can 
collect  for  its  services,  because  it  cannot  charge  each  separate 
man  what  it  pleases,  but  must  treat  all  alike.  Again,  were  the 
principles  of  universal  application,  then,  if  the  road  did  not 
serve  the  public  as  well  and  as  cheaply  as  it  could,  other  capi- 
talists would  compete  with  additional  roads.  This  is  not  always 
the  case.  The  possible  projectors  of  a  second  road  would  see 
that  freights  would  be  lowered  and  the  lessened  profits  divided 
between  the  old  and  new  roads.  Hence,  although  the  first  road 


V.  9.]  THE  LET-ALONE  PRINCIPLE.  455 

might  make  inordinate  profits,  it  would  not  follow  that  a  second 
would  pay.  If  the  second  is  the  last  built,  the  two  may  com- 
bine to  keep  up  freights,  and  the  public  will  then  find  itself 
paying  profits  on  two  roads  where  only  one  is  necessary. 

Telegraphs.  The  history  of  telegraph  companies  in  this 
country  affords  an  instructive  example  of  how  competition 
may  be  prevented  and  an  artificial  monopoly  retained  through 
an  entire  generation.  The  leading  company  long  managed  to 
keep  the  price  of  messages  above  the  natural  limit,  by  buying 
up  or  joining  hands  with  every  formidable  competing  com- 
pany. The  process  has  been  a  most  wasteful  one,  because  the 
leader  has  to  use  the  excess  of  profits  which  it  derived  from 
the  public  in  these  purchases,  thus  making  the  public  pay  for 
all  these  companies.  In  consequence  of  the  liability  to  this 
state  of  things  it  has  become  common  for  governments  to  take 
the  management  of  railways  and  telegraphs  into  their  own 
hands.  This  is  especially  the  case  with  telegraphs,  which  are 
managed  in  connection  with  the  post-office  by  all  the  leading 
governments  of  Europe,  and  that  with  great  advantage  to  the 
public. 

9.  The  strongest  objection  which  has  been  urged  against 
the  Government  of  the  United  States  undertaking  to  benefit 
its  people  in  the  same  way  is  the  supposed  lack  of  wisdom  with 
which  it  will  manage  any  such  business.  It  has  become  the 
custom  for  Congress  to  attend  almost  exclusively  to  special 
"interests"  in  shaping  its  policy,  thus  losing  sight  of  the  gen- 
eral public  welfare.  That  is,  if  any  legislation  is  proposed  on 
such  a  subject  as  the  tariff,  the  encouragement  of  industries, 
or  the  management  of  the  telegraph,  Congress  does  not  inves- 
tigate the  subject  itself  with  general  reference  to  the  public 
welfare,  but  invites  all  who  are  interested  to  present  their 
views.  Its  policy  is  then  determined  by  the  views  thus  ob- 
tained. 

Tliis  method  is  a  very  bad  one,  because  the  only  views  that 
can  be  presented  are  those  of  a  few  interested  parties,  and  tho 


456  APPLICATIONS  OF  ECONOMIC  SCIENCE. 

more  these  parties  can  gain  at  the  expense  of  the  public  the 
better  they  can  afford  to  urge  such  a  course  as  shall  be  to  their 
advantage. 

ILLUSTRATIONS. 

The  reader  who  has  carefully  weighed  the  preceding  discussion  will  per- 
ceive that  the  main  objections  to  government  regulating  the  activity  of  the 
individual  are  founded  on  purely  practical  considerations  and  not  on  abstract 
principles.  The  reason  why  wise  men  are  opposed  to  such  regulations  is  that 
under  present  conditions  it  is  scarcely  possible  to  have  them  wisely  directed 
to  the  public  good,  but  very  easy  to  have  them  employed  for  the  public 
injury.  An  illustration  of  each  of  these  possibilities  will  be  pertinent. 

1.  If  a  wise  and  intelligent  man  were  called  upon  to  devise  a  single 
measure  of  government  interference  which  should  be  of  the  greatest  bene- 
fit to  the  public  health  and  happiness,  and  which  would  be  at  the  same  time 
simple  and  easy,  he  would  probably  decide  upon  the  suppression  of  all 
quack  medicines.    The  public  spend  many  million  dollars  annually  in  pro- 
prietary pills,  bitters,  cordials,  oils,    and  other  nostrums.      Of  many  of 
these  compositions,  spirituous  liquors  of  the  worst  kind  are  the  principal 
ingredients.     They  injure  the  public  health  and  foster  the  taste  for  alcohol, 
opium,  and  other  injurious  products.    "What  is  yet  more  to  the  point,  it 
cannot  be  claimed  for  them,  as  it  can  for  alcoholic  and  vinous  drinks,  that 
they  are  sometimes  of  use  and  that  they  gratify  an  appetite.     It  cannot  be 
said  that  quack  medicines  are  useful  in  any  definable  case,  and  their  sole 
basis  is  a  fraudulent  pretense  that  they  can  cure  disease.     Yet  no  one  has 
ever  proposed  their  suppression  by  law,  and  we  may  feel  fairly  confident 
that  they  are  one  of  the  last  things  which  a  government  charged  with  the 
task  of  regulating  the  activity  of  the  citizen  would  think  of  interfering  with. 

2.  Now  take  a  case  of  the  opposite  kind.     A  few  years  ago  it  was  dis- 
covered that  a  fatty  product  known  as  oleomargarine  could  be  manufactured 
on  a  large  scale  at  a  small  cost,  and  could  be  used  as  a  substitute  for  butter. 
No  evidence  has  ever  been  adduced  that  it  is  not  as  wholesome  and  nutri- 
tious as  butter.   So  far  as  chemical  research  has  shown,  it  is  the  equivalent 
of  butter  in  all  its  relations  to  the  human  system.    Had  any  State  legislature 
consulted  the  best  chemists  within  reach,  they  would  have  learned  that  the 
manufacture  of  this  product  was  as  legitimate  as  that  of  another.     Yet  so 
strong  is  the  popular  prejudice  against  it,  that  laws  have  been  enacted  the 
tffect  of  which  is  to  discourage  the  manufacture;  and  we  can  hardly  doubt 
that  were  our  legislators  clothed  by  public  opinion  with  the  right  to  direct 
the  activities  of  the  individual,  one  of  their  first  acts  would  be  the  suppres- 
sion of  this  perfectly  harmless  manufacture.     Indeed  an  attempt  to  do  this 
was  actually  made  by  the  legislature  of  New  York,  and  was  frustrated  only 
by  a  judicial  decision  that  the  law  was  unconstitutional. 


ILL  U8TBA  TIONS.  457 

We  may  conclude  from  this  review  that  if  legislators  really  represented 
the  wisdom  of  the  nation  on  every  subject,  they  might  be  given  much  more 
power  over  the  individual.  But  so  far  as  we  have  yet  advanced,  if  we  leave 
out  the  cases  in  which  the  good  and  evil  are  so  patent  to  everybody  that 
none  can  be  deceived,  we  may  foresee  that  the  only  effect  of  such  power 
would  be  to  block  the  wheels  of  progress,  and  to  make  provisions  for  bene- 
fiting the  powerful  few  whose  views  could  be  heard  by  the  legislature  at 
the  expense  of  the  masses  whose  interests  cannot  be  felt. 

8.  To  illustrate  the  difficulty  described  in  §  9,  let  us  suppose  a  company 
to  find  that  if  Congress  can  be  induced  to  adopt  a  certain  policy,  which  we 
shall  call  policy  A,  it  can  collect  an  extra  profit  of  one  cent  per  annum  out 
of  each  inhabitant  of  the  country.  Not  one  person  out  of  a  thousand 
would  give  a  moment's  attention  to  the  wrong,  or  indeed  ever  find  it  out. 
Even  if  he  found  it  out,  it  would  not  pay  him  to  protest  against  the  policy 
merely  to  save  himself  from  a  loss  of  one  cent  a  year  for  each  member  of 
his  family.  He  could  not  send  a  letter,  or  print  a  handbill,  or  call  a 
meeting  of  his  neighbors  without  spending  more  time  than  the  question 
was  worth. 

Very  different  would  it  be  with  the  other  side.  One  cent  per  year  out 
of  each  inhabitant  would  make  an  annual  income  of  $500,000.  By  expend- 
ing a  fraction  of  this  profit  the  proposers  of  policy  A  could  make  the 
country  resound  with  appeals  in  their  favor.  At  an  annual  expense  of 
$20,000  two  or  three  new  books  could  be  published  every  year  showing 
the  necessity  or  advantage  of  policy  A,  and  a  copy  of  each  book  could  be 
sent  to  every  member  of  Congress.  Another  expenditure  of  the  same 
amount  would  suffice  for  the  payment  of  several  lecturers  on  the  subject,  and 
the  call  of  many  enthusiastic  public  meetings  to  send  petitions  to  Congress. 
A  third  instalment  would  provide  a  body  of  able  lawyers  to  plead  with 
individual  members  of  Congress.  A  fourth  would  secure  a  long  series  of 
editorial  articles,  in  various  newspapers,  all  favoring  policy  A,  and  calling 
upon  the  people  not  to  vote  for  any  man  who  opposed  it.  Thus  year  after 
year  every  man  in  public  life  would  hear  what  would  seem  to  be  the  unani- 
mous voice  of  public  opinion  on  the  side  opposed  to  the  public  interests. 

4.  Has  the  practice  of  the  let-alone  policy  any  appreciable  influence 
upon  the  development  of  men?  That  is  to  say,  let  there  be  two  countries, 
similarly  situated  in  all  respects,  in  one  of  which  the  government  looks 
carefully  after  the  citizen,  prescribing  his  going  out  and  coming  in,  and 
preventing  his  engaging  in  any  enterprise  which  the  government  does  not 
consider  beneficial;  while  in  the  other  the  government  lets  him  have  his 
own  way  and  suffer  the  consequences  of  any  unwise  acts  he  may  perform. 
What  difference  in  the  character  of  the  men  would  you  expect  to  arise  in 
the  course  of  generations?  Is  there  anything  in  the  policy  of  England  and 
America  and  the  character  of  the  Anglo-Saxon  race  by  which  you  can 
illustrate  your  conclusions? 


458  APPLICATIONS  OF  ECONOMIC  SCIENCE. 

5.  Herbert  Spencer,  in  his  Social  Statics,  claims  that  if  the  coining  of 
money  and  the  carrying  of  the  mails  had  been  left  entirely  in  private 
bands,  the  work  would  have  been  done  as  much  to  the  public  satisfaction 
as  it  now  is,  if  not  more  so.    Discuss  the  subject  from  the  point  of  view 
of  American  experience  with  railways,  express  companies,  and  telegraph 
companies. 

6.  Mr.  Henry  C.  Carey  regarded  it  an  objection  to  the  practice  of  trade 
that  traders  always  bought  goods  where  they  were  cheapest  and  sold  them 
where  they  were  dearest.     Discuss  the  advantage  of  this  system  from  a 
philanthropic  point  of  view.    What  would  be  the  effect  upon  the  pros- 
perity of  the  world  if  traders  should  adopt  a  different  policy? 

7.  When  men  are  left  to  themselves  they  always  purchase  goods  where 
they  can  get  them  the  cheapest.     By  so  doing  do  they  command  the  goods 
with  the  minimum  of  labor  to  themselves?    Can  you  imagine  a  state  of 
things  such  that  a  man  should  buy  cloth  from  some  other  than  the  cheap- 
est seller  and  yet  that  the  cloth  should  cost  him  less  labor  by  his  adopting 
that  course?    If  so,  state  whether  these  circumstances  are  such  as  can 
ordinarily  exist  in  society. 

8.  Is  the  question  of  a  prohibitory  liquor-law  an  economic  one?    How 
is  it  with  the  question  of  a  protective  tariff?    Of  laws  against  demoralizing 
publications?    If,  in  considering  the  question  proposed  in  4,  you  should 
conclude  that  individual  liberty  favored  a  vigorous  development,  would 
you  set  any  limits  to  the  proposition?    For  example,  do  you  consider  that 
the  liberty  on  the  part  of  publishers  to  issue  dime-novels  for  boys  to  read 
is  of  a  kind  which  favors  development? 


V.  10.]        THE  POLICY  OF  A  PROTECTIVE  TARIFF.  459 


CHAPTER  IL 

THE   POLICY   OF   A  PROTECTIVE   TARIFF. 

10.  ALL  nations  levy  taxes  to  a  greater  or  less  extent  upon 
goods  imported  from  foreign  countries.     Such  taxes  are  com- 
monly called   customs  ditties,  or  simply  duties.    A  scale  or 
system  of  duties  is  called  a  tariff.     A  tariff  lias  two  distinct 
economic  objects : 

Firstly.  The  raising  of  revenue. 

Secondly.  A  real  or  supposed  advantage  to  the  country  in 
"protecting"  its  producers  against  outside  competition. 

The  policy  of  levying  no  tax  on  imported  goods,  except  for 
revenue,  is  called  free  trade.  That  of  levying  taxes  to  "pro- 
mote home  industry"  is  called  protection,  or  the  protective 
policy. 

One  of  the  great  economic  questions  of  the  day  is  whether  a 
protective  tariff  is,  under  any  circumstances,  of  real  advantage 
to  a  country,  and  hence  whether  the  policy  of  levying  it  should 
or  should  not  be  upheld.  This  question  may  be  considered 
from  two  points  of  view,  namely  : 

I.  That  of  the  let-alone  principle  in  general. 

11.  That  of  the  special  question  of  public  policy. 

From  the  point  of  view  of  a  partisan  of  the  let-alone  policy 
as  a  general  principle  of  action,  there  is  no  occasion  for  pro- 
longed discussion.  All  taxes  levied  for  the  purpose  of  protec- 
tion interfere  with  the  freedom  of  the  individual  to  secure  his 
goods  on  the  terms  most  advantageous  to  himself,  and  hence 
are  violations  of  the  let-alone  principle.  If,  therefore,  all  men 
admitted  this  principle,  there  would  be  no  occasion  for  discuss- 
ing the  policy  of  protection.  Since  they  do  not  all  admit  it, 
we  shall  not  consider  it  at  all,  but  shall  consider  the  policy  of 
protection  solely  as  a  practical  one  touching  the  public  good. 


460  APPLICATIONS  OF  ECONOMIC  SCIENCE.          [V.  10. 

Moreover,  since  it  is  difficult  for  one  country  to  frame  a  policy 
havin^  in  view  the  special  benefit  of  other  countries,  we  shall 
take  account  only  of  the  interests  of  the  country  which  levies 
the  tariff.  The  question  will  then  be  whether  we  can  really 
promote  our  own  interests  by  discouraging  the  importation  of 
foreign  goods  through  the  instrumentality  of  a  tariff,  and  not 
whether  humanity  at  large  is  benefited.  This  is  the  question 
on  which  free-traders  and  protectionists  join  issue. 

"We  have  already  condemned  all  universal  theories  of  govern- 
ment the  supporters  of  which  would  apply  them  without  regard 
to  circumstances.  Now,  if  by  a  protectionist  we  understand 
one  who  contends  for  the  highest  possible  duties  on  all  impor- 
tations, without  regard  to  the  requirements  or  necessities  of  the 
situation,  we  must  admit  that  the  protectionist  takes  untenable 
ground.  As  a  matter  of  fact,  all  protectionists  do  not  take  such 
sweeping  ground  as  this.  The  general  position  taken  by  them, 
and  the  only  one  worth  considering,  is  that  as  a  general  rule 
we  can  promote  our  interests  by  a  protective  tariff  judiciously 
adapted  to  our  situation.  The  corresponding  position  of  the 
free-trader  is  that,  as  a  general  rule,  our  interests  are  promoted 
by  free  trade. 

Viewing  the  subject  from  this  standpoint,  we  see  that  if  we 
break  away  from  the  let-alone  principle,  we  restrict  our  dis- 
cussion too  much  in  confining  it  to  the  consideration  of  high 
tariffs  to  protect  ourselves  against  foreign  competition.  If 
government  is  going  to  use  its  authority  over  foreign  trade  for 
the  purpose  of  promoting  the  interests  of  its  citizens,  it  ought 
to  have  full  liberty  of  doing  so  in  the  best  way,  whether  by  a 
high  tariff  or  a  low  one.  Thus,  placing  on  the  free  list  an  arti- 
cle from  which  we  might  collect  a  duty,  because  we  think  we 
are  thus  benefiting  manufacturers  who  use  that  article  in  their 
industiy,  would  be  a  violation  of  the  let-alone  principle.  For 
we  must  then  levy  a  higher  duty  on  other  articles,  and  give 
that  which  is  free  a  special  advantage.  Again,  export  as  well 
as  import  duties  might  promote  the  public  good,  and  we  might 
even  go  so  far  as  to  specially  encourage  the  importation  of 


V.  11.]        THE  POLICY  OF  A  PROTECTIVE  TARIFF.  461 

certain  kinds  of  goods  by  bounties,  in  order  to  discourage 
home  manufactures,  if  by  so  doing  our  interests  would  be  pro- 
moted. 

11.  Looking  at  the  subject  from  this  broad  point  of  view, 
and  throwing  off  all  our  prejudices  for  or  against  active  efforts 
on  the  part  of  government  to  promote  our  general  welfare,  it 
must  be  admitted  that  many  cases  may  arise  in  which  it  would 
seem  possible  to  promote  the  interests  of  ourselves  and  our 
posterity  by  modifying  the  natural  course  of  trade.  The  fol- 
lowing are  examples : 

If  it  is  found  that  the  supply  of  iron,  coal,  and  copper  in  our 
mines  is  getting  exhausted  at  a  rate  that,  if  continued,  would 
result  in  our  posterity  being  entirely  without  these  materials, 
it  would  be  sound  policy  to  levy  a  tax  upon  the  extraction  of 
those  materials  and  to  admit  the  foreign  product  free.  Al- 
though this  would  be  an  algebraically  negative  tariff,  it  would 
in  the  proper  sense  of  the  term  be  protective,  if  we  apply  this 
term  to  any  tariff  designed  to  promote  our  good. 

If  any  manufacture  is  injurious  to  the  public  health,  selfish- 
ness would  dictate  our  adopting  such  a  course  as  would  dis- 
courage its  prosecution  by  our  own  people. 

If  the  promotion  of  some  form  of  industry  or  labor  by  a 
protective  tariff  is  proved  to  be  a  valuable  means  of  education 
to  the  people,  that  fact  would  afford  a  sound  reason  in  favor 
of  it. 

The  policy  of  permitting  the  free  importation  of  any  product 
the  home  supply  of  which  is  monopolized  by  one  or  more  par- 
ties capable  of  combining  to  keep  up  the  price  is  too  obvious 
to  need  enforcement. 

But  it  must  never  be  forgotten  that  none  of  these  cases  can 
be  proved  by  merely  vague  and  general  argument,  but  that 
each  must  rest  on  its  own  grounds.  Such  general  statements 
as,  "  Home  industry  may  be  improved  by  a  protective  tariff," 
"  The  ultimate  cost  of  a  product  may  be  diminished  by  encour- 
aging home  competition,"  are  entirely  inconclusive  and  value- 


462  APPLICATIONS  OF  ECONOMIC  SCIENCE.          [V.  12. 

less  except  as  set-offs  against  the  corresponding  general  argu- 
ments in  favor  of  free  trade.  For  example,  to  show  that  some 
particular  commodity,  such  as  silk,  should  be  protected,  it  would 
have  to  be  shown  not  only  that  things  in  general  might  be  got 
in  a  cheaper  way  by  encouraging  the  home  product,  but  that 
the  special  product  silk  would  be  thus  cheapened. 

12.  The  general  argument  for  free  trade  is  so  simple  as 
not  to  require  much  elaboration.  It  is  in  fact  nothing  more 
than  an  application  to  the  case  of  foreign  trade  of  the  reasons 
already  adduced  in  favor  of  the  let-alone  principle.  It  is  sup- 
posed that,  in  ordinary  cases  and  as  a  general  rule,  industrial 
activity  takes  the  most  advantageous  form  when  each  individ- 
ual is  left  free  to  promote  his  own  interests  in  his  own  way, 
subject  to  the  requirement  that  he  shall  not  encroach  upon  the 
corresponding  freedom  of  his  fellow-man.  The  money  paid 
for  goods  by  the  purchaser  is  a  measure  of  the  labor  expended 
by  the  purchaser  in  earning  the  money,  and  hence  in  command- 
ing the  goods.  If  they  cost  less  when  imported  from  abroad 
than  when  bought  from  his  neighbor,  that  very  fact  shows 
that,  so  far  as  he  is  concerned,  he  gets  them  with  less  labor  to 
himself  than  if  they  were  made  at  home.  The  difference  be- 
tween home  manufacture  and  importation  is  simply  this :  that 
in  the  one  case  we  make  the  goods  we  want  ourselves,  and  in 
the  other  case  we  make  other  things  to  give  foreigners  in  ex- 
change for  the  goods  we  want.  If  it  is  easier  and  cheaper  to 
us  to  make  the  things  which  we  give  in  exchange  than  to  make 
the  goods,  then  it  is  to  our  economic  advantage  to  import  them 
rather  than  to  make  them. 

We  have,  in  the  beginning  mentioned,  what  is  indeed  an  ob- 
vious fact,  that  men,  when  left  to  themselves,  try  to  supply 
their  wants  with  the  least  possible  amount  of  labor.  The  free- 
trader assumes  that,  in  doing  this,  men  are  actuated  by  sound 
common-sense.  But  the  protectionist  takes  the  ground  that 
there  are  other  and  more  intricate  questions  to  be  considered 
than  the  merely  economic  one  of  labor.  If,  in  conformity  to 


V.  13.]        TH%  POLICY  OF  A  PROTECTIVE  TARIFF.  463 

this  view  of  the  protectionist,  we  reject  the  free-trade  argu- 
ment, then  we  have  to  consider  what  reasons  can  be  assigned 
in  favor  of  a  protective  tariff.  The  reasons  which  one  meets 
are  so  numerous  that  they  cannot  all  be  considered  in  detail ; 
indeed,  the  course  most  advantageous  to  the  student  will  be  to 
examine  them  for  himself  and  reach  his  own  conclusions.  We 
shall  therefore  do  little  more  than  state  and  analyze  the  prin- 
cipal reasons  in  such  a  way  as  to  guide  his  thought  on  the 
subject. 

13.  FIRST  ARGUMENT  FOE  PROTECTION  :  The  Home-indus- 
try Argument.  The  following  is  the  form  of  the  argument  as 
usually  stated : 

It  is  important  that  our  commercial  and  manufacturing  in- 
terests should  be  protected  and  industry  promoted.  By  levy- 
ing a  tariff  upon  the  importation  of  all  products  that  can  be 
made  at  home  we  encourage  their  manufacture  at  home  •  by  a 
tariff  on  iron  we  cause  furnaces  for  the  production  of  iron  to 
be  built,  and  men  to  be  employed  in  working  them ;  levying 
duties  on  cotton  goods  causes  cotton-mills  to  be  built,  and  men 
to  be  employed  in  making  cotton  •  a  tariff  on  glass  gives  rise 
to  glass-works,  and  encourages  glass-making  •  and  so  on  indefi- 
nitely. On  the  other  hand,  were  free  trade  permitted ',  there 
would  be  an  influx  of  cheap  goods  from  abroad  which  would 
result  in  a  great  diminution  in  the  number  of  our  mills,  fur- 
naces, and  factories,  and  would  be  productive  of  a  great  dimi- 
nution in  the  amount  of  industry  devoted  to  the  manufacture 
and  sale  of  iron,  clothing,  and  other  products  of  industry 
which  could  be  imported  from  abroad. 

As  in  all  questions  of  policy,  two  logical  steps  come  into 
play  in  this  argument — the  one  of  cause  and  effect,  the  other 
of  policy.  It  concludes,  fiVst,  that,  as  a  matter  of  mere  cause 
and  effect,  the  cutting  off  of  the  foreign  supply  of  goods  pro- 
motes home  industry.  Secondly,  it  assumes  that  industry  is  a 
good  thing  and  therefore  ought  to  be  promoted.  It  is  very 
important  that  the  student  should  make  up  his  mind  on  these 


464  APPLICATIONS  OF  ECONOMIC  SCIENCE.          [V.  13. 

two  conclusions  separately  and  not  confound  them  together. 
The  first  can  be  treated  by  strictly  scientific  methods  in  such  a 
way  that  no  doubt  can  exist  in  the  minds  of  reasonable  men. 
The  second  is  one  of  those  questions  of  policy  which  every 
person  must  decide  for  himself  by  the  aid  of  his  own  common- 
sense. 

Beginning  with  the  first  conclusion,  it  is  too  obvious  to  need 
proof  that  levying  duties  on  goods  which,  were  trade  free, 
would  be  imported  must  tend  not  only  to  increase  the  home 
manufacture  of  those  particular  goods,  but  the  home  produc- 
tion of  everything  necessary  to  make  the  goods.  This  is,  in- 
deed, nothing  more  than  saying  that  when  we  throw  difficulties 
in  the  way  of  a  man  doing  something  which  he  wants  done,  he 
will  exert  himself  to  overcome  the  difficulties,  or  to  reach  his 
end  by  some  other  means.  Cutting  off  his  legs  will  encourage 
him  to  make  wooden  legs ;  depriving  him  of  machinery  will 
lead  him  to  make  more  and  better  use  of  his  hands ;  and  so  on 
indefinitely.  The  tariff  does  not  make  it  any  easier  to  manufac- 
ture our  own  goods.  It  only  makes  it  more  necessary  by  com- 
pelling us  either  to  manufacture  them  or  to  go  without  them. 

But  it  would  be  a  mistake  to  suppose  that  this  increase  in 
any  particular  production  necessarily  indicates  an  equal  in- 
crease in  the  sum  total  of  industry.  Whatever  capital  and 
labor  are  thus  devoted  to  one  form  of  industry  will,  to  a  greater 
or  less  extent,  be  withdrawn  from  other  employments.  In  the 
present  case  we  can  see  exactly  how  this  withdrawal  is  effected, 
and  how  the  compensation  is  established.  No  foreigners  are 
going  to  bring  us  their  goods,  or  allow  us  to  buy  them,  unless 
we  give  them  an  equivalent  of  our  productions  in  exchange. 
Vice  versa,  we  are  not  going  to  make  goods  for  them  unless 
we  can  get  theirs  in  return.  No  matter  how  free  trade  may 
be  between  us  and  the  Esquimaux,  we  will  not  ship  them  any 
goods.  We  cannot  under  any  circumstances  import  foreign 
goods  without  exporting  an  equivalent  of  our  own  products. 
Hence  whenever  we  diminish  importations  by  a  protective 
tariff,  we  must  at  the  same  time  diminish  the  production  of 


V.  13.]        THE  POLICY  OF  A  PROTECTIVE  TARIFF.  465 

those  goods  which,  were  trade  free,  we  should  give  in  exchange 
for  the  goods  imported.  Thus  the  compensation  is  effected  by 
withdrawing  labor  and  capital  from  the  manufacture  of  goods 
for  export,  and  devoting  it  to  the  production  of  goods  for  home 
use. 

It  would,  however,  be  a  mistake  in  the  other  direction  to  say 
that  all  the  industry  set  in  operation  by  the  tariff  is  withdrawn 
from  other  employments,  and  that  there  is  no  increase  what- 
ever. The  very  fact  that,  under  free  trade,  goods  are  im- 
ported instead  of  being  made  at  home  shows  that  we  find  it 
easier  to  make  the  goods  which  we  send  abroad  than  to  make 
those  which  we  receive  in  exchange  for  them.  Hence  when 
we  are  forced  to  make  them  ourselves,  there  must  be  an  in- 
crease in  the  sum  total  of  our  industry.  Thus  the  first  conclu- 
sion of  the  protectionist  is  shown  to  be  true  to  a  limited  extent. 

We  have  now  to  consider  the  second  principle,  which  is  that 
increase  of  industry  is,  in  itself,  a  good  thing.  This  principle 
is  really  at  the  basis  of  the  argument,  because  if  industry  is  not 
a  good  thing  in  itself,  why  should  we  take  so  much  trouble  to 
promote  it  ? 

Few  social  subjects  are  of  more  interest  to  the  philosophical 
student  than  the  views  and  practices  of  men  on  this  point.  No 
opinion  is  deeper-seated  in  the  ordinary  mind  than  that  other 
people  should  be  encouraged  to  labor,  and  that  when  they  are 
hard  at  work  the  interests  of  society  are  promoted.  This 
opinion  gathers  tenfold  strength  when  the  work  is  of  a  kind 
which  strikes  the  senses.  It  is  hardly  possible  for  any  person 
to  visit  a  great  foundry,  listen  to  the  clank  of  the  machinery, 
see  the  flames  light  up  the  evening  sky,  and  watch  the  forms 
of  a  hundred  workmen  in  active  motion,  without  being  im- 
pressed with  the  belief  that  he  sees  before  him  an  activity  of 
great  national  importance.  If  he  were  asked  how  the  labor  of 
five  hundred  washerwomen  in  the  country  compared  in  impor- 
tance with  that  of  the  foundry  employing  a  hundred  men  and 
making  a  noise  which  could  be  heard  miles  away,  it  would  strike 
him  as  very  odd  that  the  work  of  five  quiet  women  should  be 
30 


466  APPLICATIONS  OF  ECONOMIC  SCIENCE.          [V.  14. 

compared  with  that  of  one  man  working  a  great  steam- 
hammer.  It  is  perfectly  certain  that  the  washerwomen  do  not 
receive  as  much  attention  at  the  hands  of  the  public  as  the 
iron-founders.  Whether  the  importance  of  the  two  classes  to 
public  comfort  and  happiness  is  proportional  to  the  attention 
they  receive  is  an  instructive  question  for  the  student  to  think 
over. 

14.  On  this  question  of  the  desirableness  of  industry  in 
itself  the  free-trader  and  the  protectionist  come  squarely  at 
issue.  The  former,  if  he  is  going  to  take  any  tenable  ground, 
must  take  the  ground  that  industry  in  itself  is  a  positive  evil, 
or,  to  speak  more  accurately,  that  an  increased  necessity  of  em- 
ploying it  in  any  particular  direction  is  a  drawback  to  human 
enjoyment.  The  protectionist,  if  he  is  logical,  and  if  he  ac- 
cepts his  own  argument,  must  join  issue  and  claim  that  indus- 
try in  itself  is  a  good.  To  decide  the  point  it  is  necessary  to 
make  abstraction  of  everything  but  the  industry,  and  inquire 
whether  industrial  activity  is  a  good  in  itself.  For  example, 
if  a  man  were  to  do  work  in  a  foundry,  and  all  the  hammering, 
melting,  burning,  and  labor  went  on  without  any  iron  being 
produced,  or  if  these  processes  were  all  performed  over  and  over 
again  on  the  same  iron,  we  should  still  have  all  the  industiy. 
Whatever  benefits  and  advantages  would  then  inhere  in  the 
foundry  must  be  considered  as  so  much  in  favor  of  pure  in- 
dustry. The  men  would  have  the  benefit  of  the  exercise,  and 
the  managers  would  gain  experience  in  organization. 

In  this  particular  comparison  the  iron  produced  must  be  left 
out  of  consideration,  because  we  get  that  under  either  system. 
The  claim  of  the  protectionist  is,  not  that  we  should  get  no  iron 
under  free  trade,  for  we  would  get  rather  more  than  we  would 
make,  but  that  we  should  get  it  without  any  hammering,  burn- 
ing, digging,  or  other  forms  of  labor.  The  question  whether 
it  is  better  to  get  it  with  or  without  these  operations  must  de- 
pend on  whether  the  operations  are  in  themselves  a  good.  If 
iron  plus  industry  is  better  than  iron  without  industry,  it  can 


V.  15.]        THE  POLICY  OF  A  PROTECTIVE  TARIFF.  467 

only  be  because  industry  without  iron  is  a  good  thing.  This 
is  a  point  on  which  the  student  must  make  up  his  mind  for 
himself. 

15.  SECOND  ARGUMENT  FOR  PROTECTION.  Our  labor  cannot 
compete  with  the  low-priced  labor  of  Europe  without  the  wages 
of  our  operatives  being  depressed  to  nearly  the  scale  which 
prevails  abroad.  Since  there  cannot  be  two  prices  for  the  same 
commodity  where  free  competition  is  allowed,  the  rate  of 
wages  in  countries  between  which  trade  is  free  cannot  differ  by 
more  than  the  cost  of  exchange  and  transportation.  We  may 
therefore  lay  it  down  as  a  general  law  that  whenever  free  trade 
is  permitted  between  two  countries  in  which  the  scale  of  wages 
is  decidedly  different,  the  resulting  competition  will  tend  to  the 
disadvantage  of  laborers  in  the  country  wJiere  the  wages  are 
the  highest. 

At  first  sight  this  argument  might  seem  identical  with  the 
former  one.  The  difference  is  this :  in  the  first  argument  we 
are  concerned  only  with  industry  and  not  with  the  rate  of 
wages.  Wages  are  different  from  industry  in  the  abstract. 
Very  low  wages  might  promote  industry  by  compelling  men  to 
labor  more  in  order  to  make  a  living. 

One  fallacy  of  this  argument  lies  in  its  not  taking  account  of 
the  very  different  circumstances  of  different  countries.  To 
those  who  will  not  accept  any  proofs  except  of  fact,  the  fact 
that  in  England,  which  is  the  typical  free-trade  country  of  the 
world,  wages  have  long  been  much  higher  than  in  the  neigh- 
boring countries  of  Europe  where  protective  tariffs  are  in  vogue, 
ought  to  be  a  sufficient  proof.  But  the  use  of  this  particular 
method  of  proof  is  quite  beneath  the  economist,  for  the  simple 
reason  that  it  proves  nothing  except  that  free  competition  does 
not  necessarily  depress  wages  in  the  country  where  they  are 
highest.  There  may  be  great  numbers  of  causes  for  this  dif- 
ference besides  free  trade,  so  that  we  are  not  justified  in  attribut- 
ing it  to  the  latter.  The  only  satisfactory  proof  of  the  fallacy 
is  shown  by  the  reason  of  the  thing.  We  have  shown  in  Book 


468  APPLICATIONS  OF  ECONOMIC  SCIENCE.          [V.  15. 

IV.,  Chapter  VIII.,  that  no  cheapening  of  products  can  lessen 
the  sum  total  of  the  demand  for  labor  in  the  country,  because 
the  money  saved  on  any  product  goes  into  the  market  for  the 
purchase  of  labor  on  some  other  product.  Thus  the  only  effect 
which  can  be  produced  by  free  trade  is  an  increase  of  wages  for 
one  class  of  laborers,  with  a  corresponding  diminution  for 
another  class.  Should  we  introduce  free  trade,  and,  in  conse- 
quence, should  there  be  an  importation  of  x  dollars'  worth  of 
goods  which  we  had  been  making  for  ourselves,  there  would 
be  a  falling  off  of  x  in  the  demand  for  labor  to  make  these 
goods.  But  there  would  be  an  increased  demand  y  for  labor 
to  make  the  goods  we  should  have  to  give  in  exchange.  If  y 
were  less  than  a?,  the  people  who  had  been  paying  x  dollars 
would  save  the  difference,  and  have  it  to  spend  for  labor  of  some 
other  kind.  The  two  demands  y  and  x  —  y  would  exactly 
compensate  the  loss  x.  The  equilibrium  is  restored  by  a 
gradual  change  in  the  direction  of  labor  from  the  production  of 
x  dollars'  worth  of  goods  of  one  kind  to  x  dollars'  worth  of 
some  other  kind.  Such  a  change,  as  we  have  already  shown, 
can  nearly  always  be  made  faster  than  any  change  in  the  de- 
mand. 

To  the  cry,  "  We  cannot  compete  with  the  pauper  labor  of 
Europe,"  the  answer  is,  Why  do  you  want  to  compete?  And 
this  brings  us  to  the  question,  Why  are  wages  higher  here  than 
in  Europe  ?  The  answer  is,  Because  we  have  a  larger  and  more 
profitable  field  for  labor  in  developing  the  resources  of  our 
country.  Erecting  houses,  building  railways,  cutting  down  the 
forests,  digging  ore  from  our  mines,  and  raising  wheat  from  our 
prairies  afford  a  more  remunerative  employment  for  labor  than 
can  be  obtained  in  densely  populated  countries  where  the  rail- 
ways are  already  built  and  the  fields  of  wheat  are  limited.  Our 
laborer  compares  with  him  of  Europe  in  a  small  degree  as  the 
successful  lawyer  does  with  the  bootblack.  The  lawyer  can- 
not compete  with  the  bootblack  in  the  art  of  the  latter.  Does 
he  therefore  desire  the  price  of  blacking  boots  to  be  raised  lest 
IiU  professional  income  shall  be  reduced?  Not  at  all.  He 


V.  17.]        THE  POLICY  OF  A  PROTECTIVE  TARIFF.  469 

simply  does  not  compete,  but  employs  himself  more  profitably 
in  other  directions. 

16.  To  look  at  the  matter  from  a  different  point  of  view, 
let  us  consider  the  case  of  some  great  glass-factory.     Here  we 
have  a  great  industry  employing,  we  may  suppose,  a  thousand 
men  and  a  large  amount  of  capital,  consisting  of  buildings,  fur- 
naces, and  raw  materials.     Under  free  trade  this  factory  would 
perhaps  never  have  existed,  and  if  free  trade  were  permited  it 
would  perhaps  have  to  stop.     Now  what  does  all  this  mean  ? 
It  means  that  one  thousand  men  who,  had  there  been  no  pro- 
tective tariff,  would  have  been  at  work  building  railways,  erect- 
ing houses,  digging  in  the  silver-mines,  raising  wool,  or  rearing 
cattle,  have  been  turned  from  these  employments  into  building 
chimneys  and  making  glass.     Instead  of  making  things  to  give 
foreigners  in  exchange  for  glass  they  are  making  the  glass  it- 
self.   Now,  the  question  whether  this  change  is  advantageous 
depends  very  largely  upon  whether  we  are  to  assign  any  spe- 
cial value  to  the  work  of  making  glass  rather  than  to  the  other 
work  which  we  have  described.     By  fostering  the  glass  in- 
dustry we  have  diversified  employment.     But  is  this  diversity 
of  any  general  advantage?    Is  the  country  any  better  off  be- 
cause a  thousand  men  spend  their  lives  in  inhaling  noxious 
fumes  from  furnaces  rather  than  working  in  the  open  air? 
These  are  questions  for  every  one  to  consider  for  himself. 

17.  Another  consideration  which  may  be  adduced  is  that  of 
the  possible  amount  of  foreign  competition  were  all  restrictions 
removed.     Mr.  Edward  Atkinson*  estimates  the  value  of  the 
total  products  of  industry  in  the  United  States  during  the  year 
1884  at  $10,000,000,000.     During  the  same  year  the  total  value 
of  imported  merchandise  was  $668,000,000,  or  less  than  seven 
per  cent  of  our  home  production.     Were  the  tariff  abolished,  it 
is  hardly  possible  that  our  imports  could  be  doubled  ;  indeed  it 

*  The  DittrWution  of  Products,  p.  31. 


470  APPLICATIONS  OF  ECONOMIC  SCIENCE.          [V.  18. 

would  take  a  long  time  to  build  the  ships  necessary  to  bring 
in  the  double  quantity.  It  is  therefore  hardly  possible  that  7 
per  cent  more  of  our  labor  would  meet  with  foreign  competi- 
tion. And,  if  it  did,  we  should  have  to  produce  $700,000,000 
more  of  goods  to  export  in  payment.  We  should  also  have  to 
build  railways  and  rolling-stock  to  transport  the  goods  to  the 
sea-coast,  and  bring  back  those  received  in  exchange.  Thus, 
altogether,  even  the  small  percentage  in  which  the  competition 
was  felt  would  be  balanced  by  new  demands  incident  to  the 
change. 

18.  A  Protective  Policy  Mutual  and  Reciprocal.  To 
completely  understand  the  workings  of  a  protective  tariff  it  is 
necessary  to  see  that  it  is  reciprocal  in  its  action ;  that  is  to  say, 
if  a  country  A  wishes  to  protect  its  industries  against  the  com- 
petition of  a  country  B,  that  protection  can  be  secured  by  the 
action  of  B  as  well  as  by  that  of  A  itself.  The  reason  of  this 
is  that  trade  is  mutual,  and  will  not  go  on  unless  each  country 
receives  an  equivalent  for  what  it  exports.  A  stream  of  values 
is  constantly  flowing  in  each  direction,  and  the  two  streams 
being  equal,  an  obstruction  produces  the  same  effect  whether 
at  one  point  of  the  stream  or  another.  One  example  of  this  is 
seen  in  the  effect  of  an  export  duty. 

Suppose  that  the  English  nation  should  require  all  cotton 
goods  exported  to  America  to  pay  a  tax  of  50  per  cent,  while 
no  duty  was  levied  by  America.  It  would  make  no  difference 
either  to  the  exporter  of  the  cotton  from  Liverpool  or  its  im- 
porter in  New  York  whether  this  tax  was  paid  on  sailing  from 
Liverpool  or  on  arriving  in  New  York.  Hence  the  price  in 
New  York  would  be  affected  in  the  same  way,  and  the  stimulus 
to  our  own  industry  would  be  the  same  as  if  the  duty  of  50  per 
cent  had  been  levied  by  America.  The  only  difference  would 
be  that  it  would  be  the  British  Government  and  not  our  own 
which  would  collect  the  revenue.  But  this  would  make  no 
difference  to  the  cotton-manufacturers  of  our  country. 

Again,  suppose  that  all  foreign  countries  should  unite  in  lay- 


V.  18.]        THE  POLICY  Of  A  PROTECTIVE  TARIFF.  471 

ing  a  heavy  duty  upon  our  wheat,  cotton,  and  other  exports ; 
this  would  diminish  all  our  exports,  and  would  therefore  dis- 
courage the  production  of  wheat  and  cotton  in  our  own  country. 
It  would  also  prevent  our  importing  so  many  manufactured 
goods  from  abroad,  and  would  thus  in  two  ways  cause  our  in- 
dustry to  forsake  the  production  of  wheat  and  cotton  and  to 
engage  in  the  manufacture  of  those  things  which,  had  foreign 
countries  not  levied  the  tariff,  would  have  been  imported  from 
abroad.  Thus  the  general  effect  in  stimulating  and  diversifying 
industry  would  be  the  same  whether  we  or  foreigners  levied  the 
tariff  (cf.  III.  70). 

Still  there  would  be  important  differences  in  detail,  depend- 
ing upon  the  magnitude  of  the  tariff :  if  it  were  not  sufficient 
to  stop  all  trade,  then  foreign  governments  would  get  the 
benefit  of  the  revenue  and  we  would  get  none.  Moreover, 
such  a  foreign  tariff  on  our  exports  would  not  encourage  any 
special  industry  among  us,  but  only  industries  in  general.  That 
is  to  say,  we  could  not  say  that  it  would  encourage  the  iron  in- 
dustry or  the  cotton  industry  separately,  but  would,  so  to 
speak,  encourage  equally  the  production  of  everything  which, 
under  free  trade,  we  would  import  from  abroad.  On  the  other 
hand,  a  domestic  tariff  can  be  so  adjusted  as  to  protect  any  par- 
ticular industry,  the  silk-manufacture  for  example,  and  to  leave 
any  or  all  others  unprotected.  Our  own  tendency  is,  however, 
to  protect  all  our  manufactures  equally ;  and  this  can  be  effected 
by  the  foreigners  levying  their  tariff  on  our  goods  as  well  as  by 
we  levying  our  own  tariff  on  theirs.  Moreover,  the  effects  of 
the  two  tariffs  become  identical  as  they  approach  the  prohibitory 
limit.  If  all  foreign  governments  should  levy  such  tariffs  as 
to  actually  prevent  the  export  of  American  products,  all  trade 
in  both  directions  would  be  stopped,  and  the  effects  would  be 
the  same  as  if  we  should  levy  a  prohibitory  tariff  upon  all  for- 
eign  products  whatever. 


472  APPLICATIONS  OF  ECONOMIC  SCIENCE. 


ILLUSTRATIONS  AND  EXERCISES. 

I.  Basliat,  a  popular  French  economist,  published  a  burlesque  on  the 
arguments  for  protection  by  preparing  an  imaginary  petition  addressed  to 
the  Chamber  of  Deputies  by  the  manufacturers  of  everything  necessary 
to  the  production  of  light.    This  petition  showed  the  great  benefit  which 
would  arise  to  French  industry  if  a  law  were  enacted  requiring  that  the  sun- 
light should  be  rigorously  excluded  from  all  dwellings.     The  supposed 
petitioners  traced  out  the  effects  of  this  policy  upon  industry  in  some 
such  form  as  the  following: 

L  There  would  arise  a  greatly  increased  demand  for  all  products  of  in- 
dustry  necessary  to  the  production  of  light,  including  tallow,  oil,  lamps, 
and  chandeliers.  As  a  result  of  this  demand  the  industry  of  all  persons 
engaged  in  the  production  of  these  commodities  would  be  stimulated  to 
activity,  and  the  prevailing  depression  and  distress  among  them  would  be 
immediately  cured. 

II.  This  activity  would  be  transmitted  to  other  industries.     The  demand 
for  tallow  would  cause  an  increased  demand  for  oxen  and  sheep.    Thus 
more  of  these  animals  would  be  reared,  and  we  should  have  a  great  increase 
in  the  production  of  artificial  meadows,  of  wool  and  of  hides,  so  that  thn 
whole  farming  population,  including  both  land-owners  and  laborers,  would 
find  an  increased  demand  for  the  products  of  their  industry. 

III.  The  increased  demand  for  oil  would  result  in  an  expansion  of  the 
whale-fisheries;  more  ships  would  be  demanded,  and  thus  employment 
would  be  given  to  more  ship-builders.     The  latter,  in  their  turn,  would  bo 
able  to  buy  more  food  and  clothing. 

IV.  As  a  result  of  the  increased  demand  for  lamps  and  chandeliers,  all 
workers  in  brass  would  be  immediately  benefited  by  the  increased  demand 
for  their  industry.    Their  augmented  income  would  enable  them  also  to 
purchase  more  food  and  clothing.     The  increased  demand  for  food  and 
clothing  would  benefit  all  producers  of  food  and  all  makers  of  clothing. 
Thus,  step  by  step,  the  industry  of  all  classes  and  of  the  whole  nation  would 
be  stimulated  to  renewed  activity,  and  an  era  of  prosperity  such  as  had 
never  before  been  known  would  bless  the  whole  land. 

Now,  what  is  right  and  what  is  wrong  in  the  conclusions  of  this  petition  ? 
Were  the  supposed  petitioners  right  or  wrong  in  claiming  that  the  policy 
which  they  advocated  would  result  in  a  greatly  increased  demand  for  labor 
and  in  a  great  increase  in  the  national  industry  ?  Is  it  or  is  it  not  true  that 
the  production  of  tallow,  oil,  and  chandeliers  would  be  stimulated,  and  that 
the  stimulus  would  extend  to  laborers  of  every  class  ?  If  they  were  right, 
what  reason  can  you  assign  why  their  petition  should  not  be  granted?  Sup- 
pose that  by  a  little  ingenuity  an  artificial  light  could  be  produced  which 
would  be  as  good  and  as  pleasant  to  the  eyes  as  daylight:  what  reason  can 


THE  POLICY  OF  A  PROTECTIVE  TARIFF.  473 

you  assign  against  its  employment  in  lieu  of  permitting  the  free  introduc- 
tion of  daylight  ? 

2.  Now  view  the  opposite  picture  of  an  apparent  evil.     Suppose  a  tree 
discovered  in  foreign  parts,   resembling  the  cotton-plant,  but  suddenly 
brought  to  such  perfection  that  completely  made  fashionable  garments  of 
any  cut  the  planter  might  desire  could  be  made  to  grow  on  the  plant;  and 
this  with  such  ease  and  in  such  quantities  that  one  fourth  the  laborers  now 
engaged  in  cotton  cultivation  could  produce  clothing  for  the  whole  country 
at  a  merely  nominal  cost. 

Note  the  consequences.  All  the  tailors  of  the  country  would  be  imme- 
diately thrown  out  of  employment.  All  the  stores  of  cloth  and  clothing  piled 
up  in  our  warehouses  would  immediately  become  almost  valueless.  The 
value  of  all  our  factories  would  be  as  completely  destroyed  as  if  a  devouring 
angel  had  swept  over  the  land.  Capital  worth  thousands  of  millions  would 
vanish  in  a  night.  Nearly  all  the  clothiers  in  the  land  would  become 
bankrupts,  millions  of  operatives  would  be  thrown  out  of  employment,  and 
a  commercial  crisis  such  as  has  never  yet  been  known  would  supervene. 

Would  all  this  on  the  whole  be  an  evil  or  a  benefit  ?  From  the  stand- 
point of  common-sense  could  it  be  an  evil  that  everybody  should  be  well 
clothed  without  labor  and  without  price  ?  How  would  the  compensation  be 
effected,  and  what  would  be  the  ultimate  effect  of  the  new  clothes-bearing 
plant  upon  the  interests  of  the  country  ?  As  a  matter  of  policy  ought 
Congress  to  prohibit  the  introduction  and  cultivation  of  such  a  tree? 

3.  Consider  the  following  argument  and  counter-argument  for  protec- 
tion: 

Argument.  The  principal  effect  of  the  protective  tariff  is  to  benefit  the 
farmer  by  securing  for  him  a  home  market  for  the  products  of  his  farm. 
The  policy  in  question  leads  to  the  establishment  of  manufactories  in  his 
immediate  neighborhood,  thus  bringing  the  consumer  of  wheat  to  his  own 
door  as  it  were.  The  cost  of  transporting  wheat  to  a  foreign  country,  and 
of  bringing  back  the  products  of  that  country  to  the  farmer  for  his  own  use, 
is  thus  saved.  The  manufacturer  and  his  workman,  in  consequence  of  the 
stimulus  to  their  industry  given  by  the  tariff,  are  better  able  to  purchase  the 
farmer's  wheat,  while  the  farmer  himself  has  fewer  competitors  to  engage 
in  the  work  of  raising  wheat.  Thus  the  agricultural  class  is  that  most 
benefited. 

Counter-argument.  No  home  market  can  be  created  by  the  tariff  for  the 
simple  reason  that  the  demand  for  food  depends  principally  upon  the  num- 
ber of  people  to  be  fed  and  the  population  within  reach  of  the  farmers. 
The  demand  for  food  is  not  increased  by  the  tariff;  all  classes  of  laborers 
can  purchase  all  the  food  needed  for  their  subsistence  at  lower  rates  of 
wages  than  they  now  receive.  They  will  not  purchase  more  than  this  un- 
der any  circumstances.  Hence,  so  far  as  mere  selling  is  concerned,  the 
farmer  has  the  same  market  in  cither  case.  But  under  free  trade  he  can 


474  APPLICATIONS  OF  ECONOMIC  SCIENCE. 

purchase  everything  he  wants  at  a  cheaper  rate  than  he  can  if  his  foreign 
sources  of  supply  are  cut  off  by  the  tariff. 

From  the  best  data  you  have  at  hand  compare  the  cost  of  transporting  a 
cart-load  of  wheat  to  a  factory  ten  miles  away  by  horse-power  and  the  cost  of 
transporting  the  same  wheat  from  Chicago  to  Liverpool  by  railway  and 
steamship.  Compare  also  the  cost  of  sending  a  pair  of  boots  from  one  end 
of  New  York  City  to  the  other  by  a  messenger-boy,  and  the  cost  of  trans- 
porting the  same  boots  across  the  Atlantic.  From  these  comparisons  frame 
a  definition  of  the  term  "distance  from  market"  in  an  economic  sense. 
Consider  also  how  far  it  is  true  that  the  farmer  in  Illinois  must  pay  all  the 
transportation  both  ways  if  he  trades  with  a  foreign  country,  and  how  far 
it  would  be  true  to  say  that  the  foreigner  who  eats  his  wheat  and  returns 
the  goods  must  pay  the  transportation  in  both  directions.  Can  we  throw 
the  cost  upon  the  one  more  than  upon  the  other? 

4.  Why  do  the  English  desire  free  trade  with  America?    Is  it  that  they 
may  find  a  way  of  getting  their  own  goods  consumed  by  us,  or  that  they 
may  get  the  wheat  and  corn  of  our  prairies  to  feed  their  own  people  with? 

5.  Trace  out  the  points  of  resemblance  and  difference  between  the  ar- 
guments for  protection  and  the  arguments  against  labor-saving  machinery. 
So  far  as  our  own  interests  are  concerned,  is  there  any  essential  difference 
between  the  effects  of  our  markets  being  flooded  with  cheap  goods,  produced 
by  a  foreign  pauper  working  efficiently  for  almost  nothing,  and  by  the  pro- 
ducts of  a  machine  working  for  nothing  but  the  labor  of  attention? 

6.  "We  feel  very  much  pleased  when  a  foreign  market  is  opened  for  our 
goods,  but  after  they  are  sold  we  esteem  it  a  favor  if  we  freely  admit  the 
goods  the  foreigners  give  in  exchange.    When  we  find,  by  statistically 
summing  up  our  exports  and  imports,  that  we  have  sent  abroad  goods  of 
far  greater  value  than  we  have  received  in  exchange,  we  say  that  the  bal- 
ance of  trade  is  in  our  favor.    Is  this  way  of  looking  at  the  matter  in 
accordance  with  logic  and  common-sense?    If  so,  ju«t  how  far  would  you 
carry  the  principle?    If  it  should  be  found  that  we  had  exported  goods  to 
the  amount  of  one  hundred  million  dollars  and  only  received  ten  millions' 
worth  from  abroad,  would  this  show  a  desirable  state  of  things?    Is  it  any 
use  to  open  up  a  new  market  if  we  get  nothing  in  exchange?    Are  we 
better  off  the  more  we  get  in  exchange  or  the  less  we  get  in  exchange?    If 
the  former,  is  it  logical  to  try  to  diminish  the  amount  of  imports  by  protec- 
tive duties?  If  the  latter,  what  sort  of  people  should  we  select  to  bestow  our 
goods  upon? 

7.  At  the  present  time  hardly  any  fine  white  sugar  is  made  in  England; 
the  English  consumers  are  supplied  almost  entirely  from  France.    This  is 
because  the  French  Government  gives  what  virtually  amounts  to  a  bounty 
on  all  the  sugar  which  goes  from  France;  thus  enabling  French  sugar-refin- 
ers to  undersell  their  competitors.    (Mrs.  FAWCETT'S  Political  Economy.) 


THE  POLICY  OF  A  PROTECTIVE  TAEIFF.  475 

Is  it  to  the  advantage  or  disadvantage  of  the  British  nation  that  the 
French  give  this  bounty  to  their  sugar-manufacturers?  Which  view  soever 
you  take,  carry  it  out  to  its  logical  consequences  on  the  largest  scale.  Consider 
especially  a  nation  -which  we  may  call  X  surrounded  by  neighbors  who 
are  bent  on  encouraging  their  own  industry  to  the  highest  extent  at  the  ex- 
pense of  that  of  X.  Whatever  industry  X  engages  in,  some  surrounding 
nation  offers  to  its  own  producers  in  that  industry  such  a  premium  that 
they  can  produce  and  sell  the  product  to  the  people  of  X  cheaper  than 
these  people  can  make  it  themselves,  and  thus  the  manufacturers  of  X 
are  kept  at  a  relative  disadvantage.  Suppose  a  combined  attempt  were  .made 
by  the  neighbors  to  continue  this  policy  to  an  unlimited  extent:  would  the 
effect  upon  the  people  of  X  be  beneficial  or  injurious?  State  how  far  this 
policy  could  be  carried,  and  what  its  ultimate  outcome  would  be. 

8.  Analyze  the  following  arguments  for  protection,  and  show  whether 
such  a  result  is  probable: 

If  free  trade  were  permitted,  aud  if  foreign  manufacturers  found  our 
home  manufacturers  producing  anything  which  the  foreigners  could  pro- 
duce with  equal  advantage,  they  would  first  flood  our  markets  with  the 
articles  in  such  quantities  as  to  entirely  stop  the  American  production. 
The  Americans  having  disbanded  all  their  laborers  engaged  in  the  manu- 
factories and  suffered  the  machinery  to  go  into  decay,  the  foreigners  would 
put  the  price  up  until  it  was  higher  than  it  ever  was  before,  and  would  so 
keep  it  until  the  American  manufacturers  again  went  to  work.  Then  they 
would,  by  lowering  the  price,  again  repeat  the  process  of  destruction,  and 
so  on  indefinitely;  thus  subjecting  the  price  and  supply  in  our  country  to 
enormous  fluctuations,  and  causing  our  manufacturers  to  waste  time  and 
capital  in  starung  enterprises  which  were  to  be  immediately  rendered 
worthless. 

If  we  call  the  home  manufacturers  A,  B,  C,  etc.,  and  the  foreign  manu- 
facturers X,  Y,  Z,  etc.,  then  under  a  prohibitory  tariff  competition  will  be 
confined  to  A,  B,  C,  etc.,  while  under  free  trade  X,  Y,  Z,  etc.,  will  compete 
with  each  other  and  with  A,  B,  C,  etc.,  also.  Under  what  circumstances,  if 
any,  is  it  possible,  by  thus  widening  the  range  of  competition,  to  make  prices 
more  unsteady?  The  result  will  be  different  according  as  the  home  or  for- 
eign product  is  more  or  less  monopolized.  Consider  as  an  extreme  case  that 
in  which  there  is  but  one  home  manufacturer,  A,  and  but  one  foreign  man- 
ufacturer, X,  each  of  whom  has  a  complete  manufactory. 

Consider  also  whether  the  following  reversal  of  the  reasoning  is  as  sound 
as  the  other:  If  the  foreign  manufacturer  should  try  the  policy  pointed 
out,  the  result  would  be  that  America  would  supply  itself  at  a  very  cheap 
rate  with  a  large  quantity  of  the  goods,  while  the  American  manufacturer, 
though  temporarily  ceasing  his  production,  would  employ  his  time  in  get- 
ting ready  to  re  commence  at  the  first  favorable  moment.  His  men  would 
temporarily  find  other  employments.  When  the  foreigner  attempted  to 


476  APPLICATIONS  OF  ECONOMIC  SCIENCE. 

raise  the  prices,  he  would  find  no  American  buyers  until  the  stock  he  had 
formerly  sold  was  nearly  used  up.  Then  tho  American  producer,  finding 
the  market  favorable,  would  start  work  again,  thus  compelling  the  for- 
eigner to  again  lower  his  prices.  The  result  would  be  that  the  foreigner 
would  be  compelled  to  sell  to  us  below  cost  and  there  would  be  no  fluctua- 
tions whatever. 

9.  In  the  New  York  Tribune  Mr.  Horace  Greeley  once  illustrated  the 
danger  of  free  trade  by  picturing  an  imaginary  island  the  inhabitants  of 
which  supplied  all  their  own  wants  by  their  own  industry.    But  the  island 
was  discovered  by  a  nation  of  traders,  who  forthwith  sent  cargoes  of  goods 
to  it  and  offered  to  the  inhabitants  everything  that  they  wanted  at  a  cheaper 
rate  than  they  could  produce  it  themselves.     The  result  was  that  all  indus- 
try on  the  island  ceased  and  universal  ruin  overwhelmed  the  inhabitants. 

Supposing  the  inhabitants  to  be  men  of  sense,  were  they  the  happiest  or 
the  most  miserable  of  beings? 

10.  Under  the  Constitution  of  the  United  States  no  State  can  levy  duties 
upon  imports.    The  result  is  that  no  State  can  protect  its  industry  against 
the  unrestricted  competition  of  that  of  other  States,  and  thus  we  have  a 
more  extended  system  of  absolute  free  trade  on  the  American  continent 
than  in  any  other  similar  region  of  the  world.     Consider  whether  this  is  to 
the  advantage  or  to  the  disadvantage  of  the  less  developed  States.     Take 
up  the  questions  involved  in  the  following  order: 

I.  In  the  State  of  Ohio  no  great  factory  for  the  production  of  fine  cotton 
goods  has  arisen  or  can  arise  owing  to  the  superior  facilities  of  New  Eng- 
land in  that  branch  of  industry. 

11.  Is  it  not,  then,  to  the  detriment  of  the  people  of  Ohio  that  they  cannot 
protect  themselves  against  this  competition?    If  not,  why  not?    Does  the 
fact  that  the  competition  comes  from  fellow-countrymen  change  its  effect? 
Can  it  be  a  good  thing  to  have  the  manufactures  of  Ohio  crippled  by  citi- 
zens of  Massachusetts,  but  a  bad  thing  to  have  the  same  thing  done  by  for- 
eigners?   If  so,  show  in  what  the  good  consists  in  the  one  case,  and  in 
what  the  bad  consists  in  the  other  case.     Suppose  the  New  England  States 
to  be  separated  from  the  Union:  would  their  competition  then  become 
more  injurious  to  the  other  States  than  it  is  now?    Suppose  the  Constitu- 
tion to  be  so  amended  that  each  State  could  protect  its  industry  against  the 
competition  of  other  States  of  the  Union :  do  you  think  a  protectionist  party 
would  arise  in  each  State  demanding  such  protection?    Could  they  or  could 
they  not  logically  apply  the  arguments  for  protection  to  the  case? 

In  fine,  if  a  free-trader  should  argue  thus: 

That  which  is  an  evil  when  inflicted  by  one  agency  cannot  become  a 
good  merely  by  being  inflicted  by  some  other  agency.  If,  then,  it  is  an  evil 
that  the  cotton  manufacture  of  Ohio  should  be  kept  down  by  foreign  com- 
petition, it  must  also  be  an  evil  to  allow  its  suppression  by  Massachusetts 


THE  POLICY  OF  A  PROTECTIVE  TARIFF.  477 

competition,  and  the  constitutional  inhibition  in  question  is  injurious  to 
those  new  States  which  would  build  up  their  manufactures;— 
How  would  you  answer  him? 

11.  Can  a  protective  tariff  be  effective  if  it  does  not  raise  the  price  of  the 
article  protected?    That  is,  if  the  price  remains  the  same  without  the  duty 
as  with  it,  will  the  home  manufacture  be  encouraged? 

12.  It  is  sometimes  said  that  the  duty  on  each  commodity  should  be  so 
adjusted  as  just  to  enable  the  home  producer  to  compete  on  even  terms  with 
his  foreign  competitor.     What  reasons  can  you  assign  for  or  against  this 
policy?    Consider  both  its  practicability  and  its  application  to  special  cases; 
as  when  the  conditions  of  home  production  are  very  unfavorable.   Suppose 
the  policy  adopted,  and  apply  to  its  discussion  the  methods  of  III.  70,  71. 

13.  About  the  close  of  our  civil  war,  the  importers  of  a  particular  kind 
of  ore  from  Sweden  petitioned  Congress  that  it  might  be  placed  on  the  free 
list,  but  asked  for  a  high  duty  on  the  metal  extracted  from  it.    One  reason 
they  assigned  was  that  the  ore  was  very  bulky  in  proportion  to  the  metal 
extracted  from  it,  and  that  thus  employment  would  be  given  to  American 
ships  engaged  in  importing  the  ore.    Was  this  a  sound  reason,  or  the  con- 
trary? 

14.  Tin,  not  being  found  in  important  quantities  in  this  country,  is  ad- 
mitted free  of  duty  when  unmanufactured.     If  a  company  should  discover 
a  tin-mine,  we  have  every  reason  to  believe  that  they  would  immediately 
succeed  in  getting  a  duty  of  from  30  to  50  per  cent  levied  upon  imported 
tin  in  order  to  place  them  upon  the  same  level  with  the  miners  of  other 
metals.     How  would  the  price  of  tin  then  be  fixed,  and  would  the  discov- 
ery of  the  mine  prove  a  benefit  or  an  evil  to  the  community  at  large? 

15.  When,  in  the  year  1882,  we  undertook  to  build  a  few  iron-clad  ships 
of  the  first  class,  it  was  found  that  there  was  no  rolling  or  forging  machin- 
ery in  the  country  of  sufficient  power  to  roll  the  steel  plates,  and  we  had  to 
import  them  from  abroad.    Looking  more  closely  into  the  matter,  we  find 
the  following  state  of  things: 

The  ores  and  metals  of  different  countries  have  different  qualities,  so 
that  to  get  the  best  combination  for  special  purposes  it  is  necessary  to  com- 
bine those  from  different  countries,  or  to  use  some  kinds  for  one  purpose 
and  other  kinds  for  another  purpose. 

Now,  if  an  Englishman  wants  to  set  up  a  great  rolling-mill  and  forge,  he 
can  import  all  the  machinery  he  finds  necessary  into  England  free  of  duty; 
and  after  his  mill  is  built  he  can  choose  his  raw  materials  of  all  kinds  from 
the  whole  world  without  let  or  hindrance  from  the  collectors  of  customs. 

If  an  American  wants  to  erect  such  an  establishment,  he  has  to  pay  a 
heavy  duty  on  all  the  machinery  he  finds  it  necessary  to  import,  and  after 
his  works  are  built  he  must  pay  a  similar  duty,  generally  ranging  from  20 


478  APPLICATIONS  OF  ECONOMIC  SCIENCE. 

to  50  per  cent  of  the  value,  upon  nearly  everything  he  imports  for  the 
purpose  of  being  manufactured.  Can  you  trace  any  relation  of  cause  and 
effect  between  this  policy  and  the  lack  of  establishments  among  us  which 
can  compete  with  those  of  England  in  the  manufacture  of  guns  and  steel 
plates  for  war-ships? 

What  is  the  effect  of  the  policy  upon  the  building  of  iron  ships  in 
America? 

16.  In  March,  1884,  a  bill  was  before  Congress  making  a  general  reduc- 
tion of  20  per  cent  in  the  duties  upon  imports.    The  following  reasons 
against  the  bill  were  urged  by  the  minority  members  of  the  Committee  of 
Ways  and  Means: 

"The  reduction  proposed  by  the  bill  now  under  consideration  is  20 
per  cent,  and  it  is  a  noteworthy  fact  that  not  a  single  interest  in  the  United 
States  has  asked  for  it — neither  the  manufacturer,  the  miner,  the  laborer, 
the  farmer,  nor  the  consumer  has  requested  or  demanded  the  proposed  re- 
duction. On  the  contrary,  every  interest — manufacturing,  laboring,  and 
agricultural — represented  before  the  Committee  of  Ways  and  Means  has 
protested  most  earnestly  against  the  change  recommended  by  a  majority  of 
the  committee. 

"  We  have  said  that  no  interest  has  asked  for  it.  We  should  have  ex- 
ccpted  the  free-trade  clubs  of  New  York  and  Brooklyn,  which  were  repre- 
sented before  the  committee  by  a  number  of  so-called  political  economists, 
urging  not  this  reduction  alone,  but  entire  abolition  of  import  duties  which 
in  any  way  discriminate  in  favor  of  American  producers." 

Should  these  facts  have  militated  for  or  against  the  bill? 

17.  "The  categories  all  favor  free  trade,  but  the  facts  are  all  for  pro- 
tection." 

Is  this  true?  Taking  the  world  at  large,  are  the  protected  or  free  trade 
countries  most  powerful  and  prosperous?  How  do  laborers  in  England 
compare  with  those  in  Austria,  Russia,  and  other  countries  where  the  pro- 
tective policy  prevails? 

18.  Is  it  the  object  and  effect  of  a  protective  tariff  to  increase  or  to  di- 
minish the  amount  of  labor,  capital,  and  industry  necessary  to  command  a 
given  supply  of  commodities? 


V.  19.]  ON  TAXATION.  479 


CHAPTER  III. 

ON   TAXATION. 

19.  General  Considerations.  It  is  essential  to  the  exist- 
ence of  civilized  society  that  a  certain  amount  of  the  labor 
of  the  social  organism  shall  be  devoted  to  the  performance  of 
the  functions  of  government.  The  persons  who  perform  these 
functions  are  government  officers  or  employes.  They  have 
to  be  paid  for  their  services,  and  large  sums  have  to  be  ex- 
pended by  the  government  in  the  purchase  of  commodities 
for  the  public  uses.  It  follows  that  government  must  be  in 
receipt  of  an  income  with  which  to  pay  these  expenses.  This 
income  is  called  revenue.  From  the  very  nature  of  the  case  it 
cannot  be  to  any  great  extent  gained  by  production,  as  individ- 
uals gain  their  income.  It  must  therefore  be  obtained  by  a 
levy  upon  the  people  governed.  This  levy  is  called  taxation, 
and  the  money  collected  by  it  is  called  a  tax.  The  object  of 
the  present  chapter  is  to  set  forth  the  principal  methods  of  tax- 
ation, and  to  trace  their  effects  upon  the  interests  of  society. 

In  discussing  this  subject  it  is  very  common  to  consider  only 
the  effect  of  collecting  a  tax.  But  the  effect  does  not  termi- 
nate when  the  citizen  has  paid  his  money  into  the  public 
treasury.  All  money  paid  in  is  to  be  paid  out  again  by  the 
government,  and  the  disbursement  is  as  important  a  factor  in 
the  result  as  the  collection. 

The  reader  who  has  mastered  the  preceding  chapters  will  see 
that  the  inflow  and  outflow  of  the  public  revenues  are  BO  con- 
nected that  one  cannot  be  advantageously  considered  apart 
from  the  other.  Hence  when  the  economist  is  asked  what  will 
be  the  effect  if  government  should  levy  a  tax,  and  thus  largely 
increase  its  revenue,  he  would  have  to  reply:  I  cannot  tell 
what  the  effect  will  be  until  I  know  how  the  increase  of  revenue 


APPLICATIONS  OF  ECONOMIC  SCIENCE.          [V.  20. 

is  to  be  expended.  It  may  be  expended  abroad  or  at  home ; 
in  levying  war  or  in  constructing  a  canal ;  in  paying  off  a 
national  debt,  or  in  subsidies  to  various  forms  of  industry.  The 
difference  between  the  effects  of  these  various  modes  of  ex- 
penditure is  much  greater  than  the  difference  between  one 
method  and  another  of  levying  a  tax. 

2O.  We  shall  begin  by  establishing  certain  principles  com- 
mon to  all  methods  of  taxation.  In  doing  this  we  suppose  the 
reader  to  have  clearly  in  mind  the  nature  of  the  monetary 
and  industrial  circulations  as  developed  in  the  preceding  book. 
The  first  principle  to  be  understood  is  this : 

In  whatever  way  a  government  may  collect  a  tax,  the  act  of 
collection  diminishes  the  monetary  jiow  from  the  taxpayers  to 
their  fellow-citizens  by  an  amount  equal  to  the  tax.  This  re- 
sult is  so  obvious  as  not  to  need  extended  discussion.  Every 
person  who  pays  money  to  a  public  collector  has  so  much  the 
less  to  pay  to  his  fellow-men  for  their  goods  or  services,  and 
thus  his  monetary  flow  is  diminished.  If  the  taxpayer  makes 
this  up  by  charging  a  higher  price  for  his  goods,  then  the  per- 
sons who  buy  his  goods,  having  to  pay  more  for  them,  will 
have  less  money  to  spend  in  other  directions.  Thus  the  whole 
amount  of  taxes  collected  comes  out  of  the  monetary  flow  of 
the  community.  The  money  demand  for  labor  must  therefore 
fall  off  by  an  equal  amount  (IV.  37) ;  and  if  there  were  no 
compensation  for  this,  labor  to  an  amount  equal  to  the  tax 
would  be  thrown  out  of  employment  until  prices  fell  so  as  to 
restore  the  compensation.  This  effect  has  been  fully  developed 
in  Book  IV.,  Chapter  VII.,  and  therefore  need  not  be  further 
considered.  Our  conclusion  is  that  if  a  flow  T  is  collected  as  a 
tax,  a  quantity  of  labor  valued  at  T  will  be  found  waiting  for 
the  employment  of  which  it  has  been  deprived  by  its  employ- 
ers being  taxed. 

But  the  compensation  is  effected  when  government  expends 
its  revenue.  This  act  produces  the  same  effect  as  individual 
expenditure.  That  is  to  say,  all  the  money  expended  by  the 


V.  21.]  ON  TAXATION.  481 

government  goes  directly  or  indirectly  to  those  who  render  it 
services.  Payments  to  its  officers  reach  them  directly ;  pay- 
ments for  supplies  furnished  reach  the  producers  of  those  sup- 
plies through  the  regular  channels  of  trade.  Thus,  in  the  act 
of  expenditure  the  monetary  flow  is  restored  and  a  demand  for 
labor  is  set  up  equal  to  the  demand  lost  by  the  levying  of  the 
tax. 

But  this  labor  may  not  be,  and  probably  is  not,  of  the  same 
kind  as  that  thrown  out  of  employment  by  the  levying  of  the 
tax,  and  there  must  be  a  change  of  employment.  We  therefore 
reach  the  conclusion :  The  operation  of  levying  and  expend- 
ing a  tax  consists  in  diverting  a  certain  amount  of  industry 
from  the  ordinary  channels  of  business  into  the  channels  re- 
quired by  the  government* 

But  it  must  not  be  inferred  that  such  a  change  of  labor 
is  continually  brought  about  by  taxation.  When  a  govern- 
ment once  begins  raising  and  expending  its  regular  annual 
revenue,  the  change  of  industry  must  be  made  once  for  all,  and 
the  industry  will-  continue  in  its  new  course  so  long  as  the  tax 
remains  substantially  the  same.  Now  all  governments  from 
time  immemorial  have  been  obliged  to  levy  taxes  in  some  way, 
and  thus  society  has  grown  up  to  the  system  of  having  a  por- 
tion of  its  work  devoted  to  the  government  service.  A  real 
change  in  the  effect  occurs  only  when  government  makes  a 
change  in  the  amount  of  its  revenue.  If  the  revenue  is  dimin- 
ished, the  industry  in  government  channels  must  be  diminished, 
and  other  industry  increased.  The  ordinary  operations  of  tax- 
ation and  expenditure  do  not  therefore  involve  any  disturbance 
in  the  supply  of  and  demand  for  labor. 

21.  In  drawing  the  preceding  conclusions  we  have  spoken 
of  the  government  revenue  as  raised  by  taxation.  A  govern- 
ment may  also  supply  its  wants  by  borrowing  money  to  be  re- 
paid at  a  future  time.  But  all  that  has  been  said  applies  equally 

»  Cf.  Book  III.,  Chapter  V.,  ami  Book  IV.,  Chapter  X. 
31 


482  APPLICATIONS  OF  ECONOMIC  SCIENCE.          [V.  22. 

to  this  case.  So  far  as  the  immediate  effects  are  concerned,  they 
are  the  same  whether  government  raises  money  by  taxation  or 
by  loans.  Every  dollar  borrowed  comes  out  of  the  monetary 
flow  from  the  person  making  the  loan  as  completely  as  if  it  were 
obtained  by  taxation.  Every  person  who  loans  money  to  the 
government  loans  that  which  otherwise  lie  would  have  had  to 
expend  in  other  directions.  And  when  the  government  ex- 
pends borrowed  money,  it  creates  a  demand  for  labor  exactly 
the  same  as  when  it  expends  a  tax. 

In  all  this  we  refer  only  to  the  immediate  economic  effect. 
The  -ultimate  effects  are  of  course  different,  owing  to  the  re- 
payment of  the  loan.  When  a  tax  is  paid,  the  transaction 
between  the  payer  and  the  government  is  completed.  But 
when  government  raises  money  by  a  loan,  the  payer  becomes  the 
creditor  of  the  government  and  thus  a  national  debt  is  created. 
The  result  is  that  the  government  must  pay  the  creditor  an 
annual  stipend  during  a  period  of  time  which  may  be  stated  or 
may  remain  undefined.  This  stipend  is  to  be  raised  by  taxa- 
tion, which  would  not  have  been  necessary  but  for  the  loan. 
Thus  the  ultimate  result  of  borrowing  instead  of  levying  is 
that  an  increased  revenue  is  to  be  raised  in  the  future. 

22.  The  effects  of  the  various  modes  of  government  ex- 
penditure are  determined  in  the  same  way  as  the  effects  of  in- 
dividual expenditure.  This  may  be  illustrated  by  considering 
the  principal  objects  for  which  government  needs  a  revenue. 

I.  That  portion  of  the  revenue  which  government  pays  to  its 
officers  and  employes  for  their  services  returns  immediately 
to  the  circulation,  so  as  to  form  a  part  of  the  individual  income 
of  those  persons. 

II.  That  portion  which  is  expended  in  the  purchase  of  sup- 
plies is  divided  amongst    the    producers   of  the   supplies  as 
income,  in  the  way  already  pointed  out  (IY.  30).     If  all  the 
producers  are  citizens  of  the  government,  the  money  is  immedi- 
ately restored  to  the  circulation  from  which  it  was  withdrawn, 
as  in  the  first  case. 


V.  23.]  ON  TAXATION.  483 

III.  If  the  money  is  employed  in  paying  off  a  debt  held  by  its 
own  citizens,  it  will  soon  reach  the  same  general  circulation. 
Each  creditor  will  then  be  in  possession  of  a  sum  of  money 
which  he  otherwise  would  not  have  had.    As  a  general  rule  he 
will  expend  the  money  in  increasing  his  capital,  because  he  has 
been  considering  the  government  bonds  which  he  holds  as  a 
part  of  his  capital.     But,  however  he  expends  it,  it  must 
speedily  enter  into  the  general  circulation,  and  be  expended  in 
the  employment  of  labor. 

IV.  If  the  money  is  expended  in  public  improvements  in- 
tended to  yield  a  profit,  in  canals  or  railways  for  example,  the 
immediate  effect  of  the  expenditure  is  still  the  same.     But  the 
profit  to  be  ultimately  derived  from  the  improvement  will  be 
a  source  of  gain  which  would  not  have  been  enjoyed  had  the 
expenditure  been  made  for  other  purposes. 

Y.  If  the  money  is  spent  abroad  instead  of  at  home,  then 
it  is  of  necessity  withdrawn  from  the  home  circulation,  and 
added  to  the  circulation  of  the  country  to  which  it  goes.  The 
result  will  be  a  tendency  to  a  fall  of  prices  in  the  one  country 
and  a  rise  in  the  other.  This  will  ultimately  bring  the  money 
back  again,  and  thus  in  the  long-run  the  balance  will  be  restored. 

O  '  *--> 

Indeed,  it  is  highly  probable  that  the  payment  will  have  been 
made  in  the  first  place  by  exporting  goods  and  not  by  export- 
ing the  money.  That  is  to  say,  when  the  government  has  to 
make  the  payment  abroad,  it  might  purchase  foreign  exchange 
from  its  bankers.  The  home  merchants,  finding  foreign  ex- 
change scarce  in  consequence,  will  be  stimulated  to  export 
goods  in  order  to  keep  up  the  balance. 

23.  It  follows  from  all  this  that  the  really  important  ques- 
tion growing  out  of  taxation  is,  not  how  the  tax  is  to  be  levied, 
but  how  it  is  to  be  expended.  In  whatever  way  it  is  levied,  it 
will  have  come  out  of  the  pockets  of  the  community,  and  dif- 
ferent classes  will  probably  have  to  pay  nearly  the  same  in  any 
case.  But  when  the  tax  is  expended,  the  government  becomes 
the  sole  director  of  the  labor  which  it  employs  by  the  expendi- 


484  APPLICATIONS  OF  ECONOMIC  SCIENCE.          [V.  24 

ture.  Indeed,  what  is  really  expended  by  the  country  isj  not 
the  money  paid  as  tax,  but  the  labor  employed  with  it  by  the 
government.  The  money  remains,  but  the  labor  is  used  up  in 
the  performance  of  some  public  work.  "Whether  it  is  ex- 
pended for  the  public  good  or  not  depends  entirely  on  the  ob- 
ject to  which  it  is  applied.  If  expended  in  war,  then  the  labor 
of  large  bodies  of  men  is  turned  into  the  channels  of  destruc- 
tion instead  of  those  of  production,  and  the  result  is  a  loss  to 
humanity  of  the  whole  labor  thus  directed.  If  directed  to  the 
current  administration  of  justice,  an  advantage  is  gained ;  but  the 
advantage  terminates  with  itself.  If  devoted  to  public  works 
which  really  prove  profitable,  it  is  expended  with  a  future 
profit ;  if  to  unprofitable  works,  it  is  wasted.  If  devoted  to 
the  payment  of  a  debt,  then  on  the  whole  the  tendency  will  be 
to  increase  the  capital  of  the  country,  because  the  bond-holders 
who  receive  the  money  will  in  most  cases  employ  it  in  increas- 
ing their  capital. 

24.  Different  Kinds  of  Taxes.  Taxes  are  ordinarily  divided 
into  direct  and  indirect. 

A  direct  tax  is  one  which  it  is  supposed  that  the  payer  cannot 
collect  again  from  the  rest  of  the  community  by  charging  a 
higher  price  for  his  services. 

Indirect  taxes  are  those  levied  in  such  a  way  that  the  person 
who  pays  them  can  get  his  money  back  again  by  charging  the 
rest  of  the  community  a  higher  price  for  goods  on  which  the 
taxes  are  levied. 

Examples  of  direct  taxes  are  those  on  income.  An  income- 
tax  consists  of  a  certain  percentage  of  the  total  net  income  of 
the  person  on  whom  it  is  levied.  Since  the  payment  of  such  a 
tax  does  not  increase  his  power  of  rendering  service  to  the  com- 
munity, he  can  charge  the  latter  no  more  after  paying  the  tax 
than  he  could  before.  Taxes  on  the  sum  total  of  a  man's 
wealth,  and  upon  his  houses  and  lands,  are  commonly  supposed 
to  fall  into  the  same  category. 

Examples  of  indirect  taxes  are  those  levied  upon  the  manu- 


V.  25.]  ON  TAXATION.  485 

facture  of  commodities.  In  such  cases  it  is  supposed  that  the 
manufacturer  can  get  his  tax  back  again  by  charging  a  higher 
price  for  his  goods.  Thus  it  is  the  consumers  of  the  goods,  and 
not  the  manufacturers,  out  of  whose  pockets  the  tax  is  sup- 
posed ultimately  to  come.  If  every  commodity  which  is  used 
by  the  community  is  thus  taxed,  it  will  be  the  whole  commu- 
nity which  will  pay,  no  matter  how  few  the  manufacturers. 
The  tax  is  called  indirect  because  it  is  paid  by  the  consumers, 
not  to  the  government  directly,  but  through  the  men  who  sell 
goods  at  the  increased  price. 

Economically  this  classification  is  imperfect,  because  it  is 
scarcely  possible  to  determine  in  all  cases  whether  a  tax  can  or 
cannot  be  transferred  by  the  person  paying  it  charging  more  for 
his  services  or  commodities.  A  tax  on  city  real  estate,  for  ex- 
ample, will  lead  to  its  owners  charging  a  higher  rental,  so  that  it 
might  be  regarded  as  indirect.  But  if  the  owner  of  a  house 
lives  in  it,  he  can  scarcely  charge  to  others  the  tax  which  he 
pays  on  his  house.  Again,  a  manufacturer  may  not  be  able  to 
collect  his  tax  from  others  for  the  simple  reason  that  he  cannot 
sell  his  goods  at  all  after  he  raises  their  prices.  He  may  there- 
fore be  obliged  to  sustain  the  loss  himself,  or  go  out  of  business. 

25.  The  Double  Classification  of  Taxes.  The  fact  is  that 
the  methods  and  systems  of  taxation  are  so  varied  as  not  to 
admit  of  an  absolutely  exhaustive  classification.  But  the  great 
mass  of  those  which  are  collected  in  the  United  States,  and  per- 
haps in  other  civilized  communities,  may  divide  into  three 
classes,  as  follows : 

I.  Taxes  levied  on  individuals.  Under  this  head  we  in- 
clude all  taxes  which  any  individual  is  required  to  pay  irre- 
spective of  his  wealth  or  the  amount  of  his  income.  The  fol- 
lowing are  examples : 

A  poll-tax  is  a  designated  sum  of  money  which  every  male 
adult  of  a  community  is  required  to  pay  annually.  One  dollar 
was  the  common  amount  of  such  a  tax.  Being  levied  without 
reference  to  ability,  it  was  extremely  obnoxious  and  has  become 


4Si'>  APPLICATIONS  OF  ECONOMIC  SCIENCE.          [V.  25. 

nearly  obsolete.  In  the  few  States  where  it  still  exists  it  natu- 
rally costs  more  than  its  value  to  collect  it  forcibly  from  the 
individual.  Its  payment  is  therefore  generally  made,  as  in 
Virginia,  a  condition  of  exercising  the  right  of  suffrage. 

Licenses  to  practise  particular  trades  .or  professions  afford 
another  example.  In  most  of  our  cities,  bankers,  tradesmen, 
and  managers  of  nearly  every  kind  of  business  are  required  to 
pay  a  certain  sum  annually  for  the  privilege  of  exercising  their 
avocations.  The  payments  for  this  license,  being  fixed  without 
regard  to  the  extent  of  the  business,  constitute  a  purely  individ- 
ual tax. 

II.  Taxes  on  production.     The  distinguishing  feature  of  a 
tax  on  production  is  that  it  is  a  percentage  of  the  value  of 
something  which  the  individual  produces.     For  example,  an 
excise  duty  on  spirituous  liquors  is  a  tax  of  so  much  per  gallon 
produced.     Those  who  do  not  produce  the  articles  taxed  have 
no  tax  to  pay  directly  to  the  government.     Customs  duties  on 
foreign  imports  belong  to  the  same  class,  because  the  fact  that 
the  production   is  that  of    a  foreigner  does  not  change  the 
application  of  the  general  principle.     So  far  as  we  are  con- 
cerned, any  person  who  imports  goods  stands  to  us  in  the  relation 
of  a  producer  of  the  goods.     The  tax  he  has  to  pay  is  propor- 
tional to  the  amount  of  goods  he  supplies  us  with. 

Taxes  on  production  are  of  two  kinds,  according  to  whether 
they  are  levied  on  specially  designated  articles,  or  on  the  total 
productivity  of  the  individual.  Those  which  we  have  already 
mentioned  as  examples  are  levied  upon  special  products.  The 
total  productivity  of  the  individual  is  measured  by  his  income, 
so  that  a  tax  on  this  basis  is  an  income-tax.  "When  such  a  tax 
is  levied,  the  individual  is  required  to  make  known  to  the  gov- 
ernment his  total  profits  and  earnings  for  the  year,  and  to  pay 
a  designated  percentage  of  them  into  the  treasury. 

III.  Taxes  levied  on  accumulated  wealth.     These   differ 
from   taxes  on  production   in  this  very  important   respect: 
that  the  former  are  paid  once  for  all,  while  in  the  case  of  the 
latter  the  same  wealth  has  to  pay  over  and  over  as  long  as  it  is 


V.  25.] 


ON  TAXATION. 


487 


kept.  "When  a  keg  of  beer  lias  once  paid  the  excise  duty  it  is 
free  ever  thereafter.  When  an  income-tax  only  is  levied,  an  in- 
dividual who  gains  a  surplus  income  of  $1000  year  after  year 
has  only  to  pay  the  same  annual  tax  year  after  year.  But  if  he 
invests  this  income  in  any  form  of  capital,  then  for  every  thou- 
sand dollars  he  invests  and  keeps  he  has  to  pay  an  annual  tribute. 

A  tax  on  accumulation  may  be  levied  on  the  same  two 
systems  as  one  on  production.  That  is  to  say,  it  may  be  levied 
only  on  certain  designated  kinds  of  wealth,  such  as  bank- 
stocks,  houses,  lands,  carriages,  watches,  etc.,  or  it  may  be 
levied  on  one's  whole  possessions  without  regard  to  their 
character. 

It  follows  that  there  is  a  double  classification  of  taxes.  The 
one  classification  turns  upon  the  general  condition  which  de- 
termines the  amount  of  the  tax,  whether  the  latter  is  purely 
personal  or  depends  upon  production  or  accumulation.  The 
other  division  depends  upon  whether  the  tax  is  levied  on  sums 
total  or  is  confined  to  certain  designated  objects. 

This  double  classification  will  be  made  more  clear  by  pre- 
senting it  in  a  tabular  form. 


CLASSIFICATION. 

ORDER  A. 
Taxes  on  totals,  or 
unlimited  taxes. 

ORDER  B. 
Taxes  confined  to 
designated  subjects. 

Class  I. 
Taxes  on  persons. 

A  tax  on  every  one  of  a 
certain  age  or  sex. 
(Poll-tax.) 

Tuxes  on  designated  oc- 
cupations. 
(Licenses.) 

Class  II. 
Taxes  on  production. 

Tax  on  total  production 
of  every  individual. 
(Income-tax.) 

Tax  on  designated  pro- 
ducts only. 
(Customs,  excise  duties.) 

Class  III. 
Taxes  on  accumulation. 

TUJ-CS  on  one's  whole  pos- 
sessions, witJiout  regard 
to  their  character. 

Taxes  on  designated  kinds 
of  wealth:  watches,  jew- 
elry, plate,    carriages, 
etc. 

488  APPLICATIONS  OF  ECONOMIC  SCIENCE.          [V.  26. 

26.  Resuits  of  levying  a  Tax.  Although,  as  already  stated, 
tho  economic  questions  involved  in  the  expenditure  of  a  tax  are 
more  important  than  those  involved  in  its  levy,  yet  the  latter 
are  most  in  need  of  investigation.  There  are  two  reasons  for 
this.  In  the  first  place,  the  objects  for  which  revenue  is  to 
be  expended  are  generally  determined  by  circumstances,  and 
not  by  the  arbitrary  will  of  the  government  or  of  the  citizens. 
There  are  certain  officials  to  be  employed  and  paid,  certain 
supplies  to  be  furnished,  certain  debts  to  be  liquidated,  irre- 
spective of  the  will  of  the  government  for  the  moment.  But 
the  method  in  which  the  tax  shall  be  levied  is  altogether  a 
matter  for  the  decision  of  the  public. 

In  the  next  place,  the  very  fact  that  taxes  paid  into  the  pub- 
lic treasury  come  out  of  the  monetary  circulation  makes  the 
public  very  critical  in  inquiring  into  them,  and  it  is  necessary 
not  only  to  consider  what  is  theoretically  the  best  kind  of  a 
tax,  but  also  what  method  of  taxation  is  least  displeasing  to  the 
public.  Thus  the  question  of  the  best  method  of  raising  a 
government  revenue  becomes  a  very  delicate  one,  involving 
not  only  purely  economic  considerations,  but  questions  of  politi- 
cal expediency .  The  success  of  a  system  of  taxation  depends  so 
largely  upon  the  condition  of  the  people  taxed  that  no  system 
founded  solely  on  a  general  theory  can  be  relied  upon.  Still 
we  should  have  some  guiding  principles  to  start  with.  Four 
such  principles  were  laid  down  by  Adam  Smith,  of  which  the 
first  was  in  the  following  words: 

"  The  subjects  of  every  state  ought  to  contribute  to  the  sup- 
port of  the  government,  as  nearly  as  possible  in  proportion  to 
their  respective  abilities;  that  is,  in  proportion  to  the  revenue 
which  they  respectively  enjoy  under  the  protection  of  the 
state." 

The  remaining  three  principles  were:  (1)  that  the  tax  to 
bo  paid  by  each  individual  should  be  certain  and  not  arbitrary  ; 
(2)  that  it  should  be  payable  at  the  time  and  in  the  way  most 
convenient  to  the  payer;  (3)  that  the  cost  of  collection  should 
be  as  small  as  possible. 


V.  27.]  ON  TAXATION.  489 

27.  The  tax  which  most  directly  accords  with  the  first 
maxim  is  one  upon  gross  income.  In  fact,  since  Smith  defines 
ability  to  pay  as  measured  by  the  revenue  which  the  citizen 
enjoys  under  the  protection  of  the  state,  and  as  this  revenue  is 
neither  more  nor  less  than  his  income,  it  follows  that  an  income- 
tax  is  the  very  one  indicated.  Such  a  tax  is  levied  by  deter- 
mining every  man's  income  from  all  sources  year  by  year,  and 
requiring  him  to  pay  a  certain  percentage  of  it  into  the  public 
treasury.  In  Great  Britain  the  imposition  of  such  a  tax  is  the 
most  common  method  of  meeting  an  unusual  demand  upon  the 
public  resources.  It  was  levied  by  the  United  States  during 
several  years  after  the  termination  of  the  civil  war. 

It  follows  that  if  an  income-tax  could  be  justly  levied,  it 
would  be  the  only  one  which  we  should  impose.  But  when  we 
come  to  the  question  of  levying  it  we  meet  with  a  practical 
difficulty  at  the  very  outset.  In  order  to  determine  how  much 
a  man  must  pay,  the  government  must  learn  first  what  his  total 
income  is.  Now,  although  the  amount  of  one's  income  can  be 
defined  with  all  necessary  precision,  its  actual  calculation  in 
dollars  by  government  agency  involves  difficulties  which  are 
quite  insurmountable.  The  result  of  these  difficulties  is  that, 
in  practice,  an  income-tax  is  among  the  most  unjust  and  demor- 
alizing that  the  Government  of  the  United  States  has  ever  at- 
tempted to  levy.  Why  this  is  so  will  be  seen  by  looking  more 
closely  into  the  conditions. 

In  the  first  place,  it  is  impossible  for  any  government  agency 
to  know  much  of  the  business  of  the  individual  by  any  investi- 
gation which  that  agency  can  conduct.  The  government  must 
therefore  depend  very  largely  on  the  man's  own  statements.  If 
the  man  can  avoid  making  any  statement  at  all,  which  he  may 
perhaps  do  by  keeping  away  from  the  assessor's  office,  the  latter 
will  have  but  little  material  for  a  conclusion.  It  is  true  that  in 
such  cases  the  law  requires  the  assessor  to  determine  the  man's 
income  in  the  best  way  he  can,  and  then  to  add  a  considerable 
percentage  to  his  estimate,  and  tax  the  man  accordingly.  But 
it  has  been  decided  that  this  law  does  not  mean  that  the  asses- 


490  APPLICATIONS  OF  ECONOMIC  SCIENCE.         [V.  27. 

sor  may  arbitrarily  guess  anything  he  pleases  as  tlie  man's  in- 
come, but  that  his  estimate  must  be  founded  on  some  sufficient 
data.  The  result  is  that  if  no  data  can  be  found,  or  if  those 
found  do  not  correctly  indicate  the  income,  the  conditions  re- 
quired by  the  law  are  not  fulfilled.  What  is  yet  more  demor- 
alizing, even  if  the  man  is  caught  and  brought  to  the  asses- 
sor's office,  it  is  to  his  interest  to  estimate  his  income  as  low  as 
possible.  Thus  a  premium  is  at  oiice  offered  to  dishonesty, 
an  act  which  every  government  should  do  all  in  its  power  to 
avoid. 

But  granting  that  the  government  has  every  facility  for  in- 
vestigating every  man's  business,  new  inequalities  arise  from 
the  fact  that  the  income  proper,  as  defined  in  economics,  may 
be  very  different  from  income  as  determined  by  legal  calcula- 
tions. In  the  case  of  persons  in  receipt  of  fixed  salaries  or 
fees  the  income  is  perfectly  definite,  and  if  the  government 
can  determine  it,  it  affords  a  correct  basis  for  the  tax.  The  in- 
equality enters  in  the  case  of  establishments  where  several  pro- 
ducers work  together  in  unison,  and  consume  a  part  of  their 
own  products.  An  extreme  case  is  that  of  a  large  farm  with 
a  wealthy  owner  consuming  its  products.  The  farmer  may, 
from  an  economic  standpoint,  be  in  the  actual  enjoyment  of  a 
large  income.  For  example,  he  has  a  retinue  of  servants 
whom  he  feeds  from  the  produce  of  his  farm.  He  has  his  own 
horses  and  cattle,  and  feeds  them  from  his  farm.  He  owns 
his  house,  barns,  stables,  etc.,  and  pays  no  rent  for  them.  His 
economic  income,  on  which  he  should  be  taxed,  includes  the 
money  value  of  all  these  sources  of  enjoyment.  But  the  as- 
sessor can  only  levy  upon  the  products  of  his  farm  which  he 
has  actually  sold,  and  from  these  sales  the  farmer  must  be  al- 
lowed to  subtract  all  that  he  has  paid  for  cultivation. 

The  result  of  all  this  is  that  in  practice  the  agricultural  class 
are  almost  exempt  from  an  income-tax,  which  is  levied  mainly 
upon  the  residents  of  cities.  Among  these,  salaried  and  pro- 
fessional men  pay  much  more  than  their  proper  share. 


V.  28.]  ON  TAXATION.  491 

28.  "We  conclude,  therefore,  that,  instead  of  attempting  di- 
rectly to  determine  the  revenue  which  each  man  enjoys  under 
the  protection  of  the  State,  a  tax  must  be  levied  on  such  visible 
indications  of  revenue  as  the  agents  of  the  government  can  find. 

o  o 

It  has  already  been  pointed  out  that  whenever  a  tax  is  levied 
upon  a  manufactured  product  the  manufacturer  can,  to  a 
greater  or  less  extent,  collect  the  tax  from  his  customers  by 
charging  a  higher  price.  It  is  therefore  very  generally  as- 
sumed that,  however  a  tax  may  be  levied,  it  comes  ultimately 
out  of  the  pockets  of  the  community  in  proportion  to  their 
ability  to  pay. 

On  the  other  hand,  all  taxes  on  production  are  often  considered 
burdens  upon  industry.  By  making  the  product  cost  more 
they  discourage  its  consumption,  and  thus  the  regular  opera- 
tions of  commerce  may  be  greatly  interfered  with.  We  have 
now  to  consider  the  relative  merits  and  demerits  of  different 
systems  of  taxation  from  this  point  of  view. 

The  system  in  vogue  in  the  different  States  of  the  Union 
differs  from  that  generally  adopted  in  Europe  in  that  taxes  are 
mostly  of  that  class  and  order  which  are  levied  on  one's  whole 
possessions  without  regard  to  their  character,  while  such  taxes 
are  little  known  in  Europe.  There  are  two  reasons  for  this. 
The  strongest  one  is  that  taxes  on  production  would  immedi- 
ately place  the  manufacturers  of  each  State  levying  them  at  an 
apparent  disadvantage  in  competing  with  those  of  the  neigh- 
boring States,  where  the  same  tax  might  not  be  levied.  There- 
suit  is  that  such  a  tax  should  be  uniform  throughout  the  whole 
country,  and  this  requires  that  it  should  be  levied  by  the  gen- 
eral government.  This  leaves  only  the  first  and  third  classes 
open  to  the  States.  The  personal  taxes  of  the  first  class  are 
wholly  insufficient.  Hence  States  fall  back  upon  those  of  the 
third  class  by  taxing  accumulation.  It  is  very  natural  to  meas- 
ure one's  ability  to  pay  by  his  accumulated  wealth;  and  if  we 
regard  only  this  ability,  without  reference  to  the  indirect  con- 
sequence to  society,  or  the  practical  difficulties  in  the  way  of 
determining  his  wealth,  this  kind  of  tax  is  a  very  fair  one. 


492  APPLICATIONS  OF  ECONOMIC  SCIENCE.          [V.  28. 

Such  a  tax  is,  however,  subject  to  the  same  kind  of  objec- 
tions which  have  been  brought  against  the  income-tax.  The 
system  has  proved  sucli  a  failure  that  it  is  wonderful  how  our 
State  legislatures  persist  in  trying  to  enforce  it.  The  objec- 
tions are  these : 

In  the  first  place,  it  is  impossible  to  find  out  what  wealth 
every  man  possesses.  The  assessors  can  see  and  value  his 
houses  and  lands,  and  can  guess  at  the  value  of  his  furniture. 
They  may  readily  find  out  whether  he  has  horses  and  car- 
riages, and  can  guess  at  their  value.  When  they  attempt  to 
do  more  than  this,  difficulties  begin  to  arise. 

It  is  obviously  necessary  that  every  man  shall  have  the  right 
to  subtract  the  debts  he  owes  from  the  amount  of  the  prop- 
erty which  he  possesses,  in  order  to  determine  his  actual  owner- 
ship. This  he  is  sure  to  do.  On  the  other  hand,  the  amount 
of  the  debt  should  be  charged  as  a  part  of  the  property  of  the 
creditor.  This  is  something  which  the  creditor  may  or  may  not 
do,  and  which  it  is  probable  that  in  the  majority  of  cases  he 
does  not  do.  It  will  cost  more  to  learn  the  amount  due  him 
than  the  labor  is  worth.  U.  S.  bonds  are  not  taxable  under  our 
laws.  It  is  said  that  in  the  city  of  New  York  there  is  an  in- 
creased demand  for  these  bonds  at  the  time  when  the  assessors 
perform  their  annual  duty,  caused  by  the  great  number  of  men 
who  at  that  time  put  their  wealth  into  the  form  of  bonds  in 
order  to  lessen  the  amount  of  their  taxable  property. 

The  next  objection  to  this  system  is  that  it  makes  no  distinc- 
tion between  property  employed  in  reproduction  for  the  bene- 
fit of  society,  and  that  employed  in  one's  own  private  consump- 
tion. Here  it  is  that  the  system  adopted  by  our  States  shows 
at  its  worst.  No  doubt  the  idea  that  this  is  a  poor  man's  coun- 
try has  to  a  certain  extent  given  color  to  our  system.  But  if 
so,  the  idea  has  not  been  intelligently  carried  out.  Since  a  tax 
must  always  be  levied  on  something  which  the  assessor  can 
find,  it  follows  that  the  most  rational  system  is  that  which 
taxes  the  visible  manifestations  of  wealth.  Abroad  this  prin- 
ciple is  fully  recognized.  The  public  exhibition  of  every- 


V.  29.]  ON  TAXATION.  493 

thing  which  indicates  rank  and  position  is  heavily  taxed  in 
England.  For  domestic  servants  above  a  certain  class,  gold 
and  silver  plate,  carriages  and  horses,  the  privilege  of  embla- 
zoning a  coat  of  arms,  and  other  indications  of  wealth,  family, 
and  social  position,  heavy  payments  must  be  made.  In  the 
United  States  no  notice  is  taken  of  these  exhibitions,  but,  in- 
stead of  doing  so,  our  assessors  are  engaged  in  a  futile  effort  to 
learn  the  snm  total  of  a  man's  debts,  credits,  stocks,  and  bonds. 

29.  We  shall  close  with  a  few  general  ideas  on  onr  sys- 
tem of  taxation.  The  great  defect  of  this  system  is  that  it  is 
founded  only  on  onr  natural  ideas  of  what  is  equitable,  and 
that  our  legislators  totally  ignore  the  results  of  experience  as 
to  what  is  really  practicable. 

The  first  step  in  improving  our  system  will  be  to  give  up 
entirely  every  attempt  to  tax  a  man's  total  possessions,  and  in- 
deed to  give  up  every  idea  of  an  abstractly  equitable  system. 
Our  policy  should  then  be  : 

I.  To  tax  nothing  the  possession  of  which  cannot  readily  be 
discovered  by  the  assessors. 

II.  To  tax  all  visible  manifestations  of  wealth  in  what  the 
old  geometers  called  a  duplicate  ratio ;  that  is,  in  a  ratio  yet 
higher  than  that  of  the  amount  of  wealth  manifested. 

III.  To  tax  real  estate  and  other  forms  of  wealth  which  can- 
not be  concealed. 

IV.  To  tax  all  products  which  are  designed  for  the  indul- 
gence of  the  appetites. 

"We  need  scarcely  fear  that  any  tax  levied  according  to  a 
general  law  will  be  permanently  inequitable.  Take  for  exam- 
ple the  case  of  real  estate.  No  one  is  compelled  to  own  it,  but 
as  all  are  compelled  to  use  it,  it  is  probable  that  the  owners 
can  divide  the  tax  equally  among  the  community.  The  fact  is 
that  there  is  little  danger  that  any  reasonable  system  of  taxa- 
tion will  be  inequitable  in  the  long-run. 


494  APPLICATIONS  OF  ECONOMIC  SCIENCE,          [V.  31. 


CHAPTER  IV. 

MONOMETALLISM   AND   BIMETALLISM. 

30.  WE  assume,  in  starting,  what  will  be  more  fully  shown 
hereafter,  that  at  the  base  of  every  sound  system  of  currency 
must  lie  a  right  of  the  holder  of  bank-notes  or  other  forms  of 
paper  currency  to  demand  a  definite  quantity  of  something 
having  value  in  exchange  for  his  notes.     "We  have  seen  that 
practically  the  precious  metals  are  the  only  commodities  which 
have  hitherto  been  extensively  used  for  this  purpose.     We 
have  also  seen  (Book  II.,  Chapter  XII.)  that  the  rival  monetary 
systems  of  the  present  day  among  the  leading  commercial  na- 
tions are  monometallism  and  bimetallism. 

Monometallism  is  the  system  under  which  a  government 
coins  only  a  single  metal  as  unlimited  legal  tender.  Theoreti- 
cally this  metal  may  be  gold  or  silver,  but  practically  it  is 
only  gold  among  the  leading  monometallist  nations  of  Europe. 
The  bimetallic  system  permits  the  unlimited  coinage  of 
either  gold  or  silver.  It  also  permits  payment  to  any  amount 
to  be  made  in  either  metal  at  the  pleasure  of  the  paying  party. 

We  have  now  to  consider  the  relative  effects  and  practica- 
bility of  the  adoption  of  these  two  systems.  Before  proceed- 
ing to  this  discussion  it  is  essential  that  the  student  should 
have  the  facts  of  the  case  clearly  in  mind  as  they  have  been 
set  forth  in  the  chapter  already  referred  to.  He  will  then 
understand  the  following  statement  of  the  point  at  issue 
between  the  two  parties.  We  begin  with  the  views  of  the 
bimetallist. 

31.  The  BimetaUist  View.      The  ground  taken  by  the 
biinetallist  is  that  if  the  leading  nations  will  only  agree  to 
coin  silver  and  gold  at  any  uniform  ratio  of  value  previously 


V.  31.]  MONOMETALLISM  AND  BIMETALLISM.  495 

agreed  upon,  the  market  value  of  the  two  metals  -will 
necessarily  correspond  to  this  ratio.  Suppose,  for  example, 
that  it  is  agreed  that  the  silver  dollar  shall  weigh  sixteen  times 
as  much  as  the  gold  dollar;  that  is,  that  government  establishes 
the  rule  that  for  monetary  purposes  the  ratio  of  the  valne  of 
gold  to  that  of  an  equal  weight  of  silver  shall  be  16 : 1.  Then, 
says  the  bimetallist,  if  there  is  a  large  increase  in  the  silver- 
supply  without  any  increase  in  the  gold-supply,  this  increase 
cannot  result  in  any  great  fall  in  the  price  of  silver  as  com- 
pared with  gold,  because  people  will  then  coin  silver  rather 
than  gold,  and  thus  the  surplus  will  all  be  absorbed  in  the  in- 
crease of  the  eilver  money.  If,  on  the  other  hand,  silver  be- 
comes comparatively  scarce  as  compared  with  gold,  the  only 
result  will  be  that  gold  rather  than  silver  will  be  coined ;  and 
since  a  dollar  of  either  metal  will  equally  answer  the  purpose, 
no  preference  can  arise  for  one  over  the  other.  A  condensed 
statement  in  its  extreme  form  is  as  follows : 

"  The  abundant  metal  is  the  least  demanded.  Its  tendency 
is  to  be  depreciated,  while  the  scarcer  metal  becomes  dearer. 
But  it  is  evident  that  if  to  increased  production  we  can  con- 
tinue to  oppose  increased  demand,  and  to  decreased  production 
decreased  demand,  we  shall  maintain  the  equilibrium  and 
things  will  remain  unchanged.  This  is  precisely  what  we  pro- 
pose to  do.  For  the  demand,  which,  without  the  adoption  of 
the  tariff  of  15£,  would  be  directed  to  the  metal  which  is 
scarce,  would,  if  the  tariff  were  anywhere  in  force,  bo  directed 
to  the  metal  that  is  abundant.  For  if  the  bimetallist  law 
permits  each  and  every  one  to  pay  his  debts  at  will  in  gold  or 
silver,  every  one  must  see  that  the  dealers  in  money  will 
neglect  the  metal  which  is  hard  to  find,  and  will  seek  for  that 
which  is  plentiful,  to  have  it  coined.  Moreover,  the  scarce 
metal,  if  it  is  not  in  demand,  will  not  rise  in  price,  and  the 
abundant  metal,  if  active  demand  springs  up,  cannot  fall."  * 


*  Cernuschi,  as  quoted  iu  Walker,  Money,  p.  258,  from  Banker*'  Maga- 
zine, N.  Y.,  Nov.  1876. 


496  APPLICATIONS  OF  ECONOMIC  SCIENCE.          [V.  33. 

TJw  Monometattist  View.  The  ground  taken  by  the  mono- 
metallist  is  that  the  permanent  use  of  two  metals  as  money 
is  impracticable.  There  is  in  the  great  markets  of  the  world 
a  certain  ratio  between  the  value  of  a  definite  weight  of  gold 
and  the  value  of  an  equal  weight  of  silver  which  fluctuates 
from  year  to  year  with  the  supply  and  demand  of  the  two 
metals.  Assume  the  ratio  16  : 1  to  be  adopted.  If  the  value 
of  gold  becomes  greater  than  that  of  sixteen  times  its  weight 
in  silver,  the  latter,  being  the  cheaper  metal,  will  be  preferred 
in  payment.  Consequently  the  paying  party  will  not  pay  in 
gold  at  all,  but  will  send  silver  to  the  mint  for  coinage  in 
order  that  he  may  make  his  payments  in  silver.  The  result 
will  bo  that  gold  will  disappear  from  circulation  entirely,  and 
we  shall  not  have  bimetallism,  but  silver  monometallism. 

If,  on  the  other  hand,  gold  is  worth  less  than  sixteen  times 
its  weight  of  silver;  if,  for  example,  the  market  ratio  is  15  : 1, 
then  for  the  same  reason  silver  will  stop  circulating  as  money, 
and  we  shall  have  gold  monometallism.  The  result  is  that 
the-  system  of  bimetallism  really  results  in  a  fluctuation  be- 
tween one  form  of  monometallism  and  another  according  to 
the  supply  and  demand  of  the  two  precious  metals  thus  caus- 
ing unlimited  confusion  in  the  course  of  trade. 

32.  Criticism,  of  the  Arguments.  "VVe  need  not  inquire 
which  of  these  arguments  is  the  stronger,  because  each  of 
them  is  insufficient,  owing  to  its  being  founded  on  one  side  of 
the  case  and  containing  no  suggestions  how  the  other  side  is 
to  be  taken  into  account.  Each  side  cites  a  true  cause  as  the 
basis  of  its  view,  and  the  only  way  in  which  a  decision  can  be 
reached  is  by  weighing  each  cause  and  thus  learning  which  pre- 
ponderates. This  cannot  be  done  with  entire  precision,  be- 
cause the  result  depends  upon  matters  of  fact  about  which  our 
knowledge  is  extremely  limited.  It  is,  however,  easy  to  show 
how  the  weighing  of  the  two  causes  should  be  conducted. 

The  arguments  of  the  bimetallist  would  be  perfectly  sound 
if  the  precious  metals  had  no  other  use  than  that  of  being 


V.  82.]  MONOMETALLISM  AND  BIMETALLISM.  497 

coined  into  money.  In  such  a  case,  whatever  the  monetary  ratio, 
one  kind  of  a  dollar  would  serve  the  purpose  as  well  as 
another,  even  though  there  should  be  fifty  silver  dollars  in 
circulation  to  one  of  gold.  This  comparative  scarcity  of  gold 
would  no  more  increase  the  value  of  gold  dollars  than  the 
scarcity  of  a  particular  kind  or  tint  of  gold  would  increase  the 
value  of  that  kind  of  gold. 

But,  as  a  matter  of  fact,  the  precious  metals  have  other  uses 
than  this,  and  the  fallacy  of  the  bimetallist  consists  in  ignor- 
ing that  fact,  or  rather  in  claiming,  without  fully  proving  the 
claim,  that  the  result  of  these  other  uses  is  insignificant.  It 
is  quite  possible  that  not  more  than  half  the  gold  and  only,  a 
small  fraction  of  the  silver  which  is  now  in  the. world  is  in 
use  as  money.*  Wares,  jewelry,  .picture-frames,  spoons,  the 
filling  of  teeth,  and  plate  of  all  kinds  continually  absorb  it. 
Hence  the  weight  of  gold  in  a  gold  dollar  may  have  a  higher 
market  value  than  the  weight  of  silver  in  a  silver  dollar,  or 
vice  versa,  according  to  the  demand  for  the  two  metals.  In 

*  This  is  a  subject  on  which  it  is  difficult  to  make  any  general  statement, 
partly  on  account  of  the  somewhat  indefinite  meaning  of  the  term  supply, 
and  partly  because  the  state  of  the  case  is  continually  changing.  The  fact 
is  that  an  unexplained  mystery  now  surrounds  the  question  of  the  stock 
of  gold  in  this  country.  From  the  statistics  of  exports,  imports,  and  coin- 
age during  a  number  of  years  past,  the  Director  of  the  Mint  estimated  the 
stock  of  gold  coin  in  the  country  in  1884  to  be  552  millions  of  dollars.  Of 
this  stock  there  \vas  held 

By  the  Treasury 89  millions. 

By  national  banks 98        " 

Lea"ing,  as  is  supposed,  in  other  hands 885        " 

552  millions. 

Of  this  stock,  only  the  187  millions  in  the  Treasury  and  the  banks  can  be 
really  ascertained  to  exist;  the  remaining  365  is  supposed  to  be  in  circula- 
tion. But  in  fact  no  gold  at  all  is  in  actual  circulation  from  hand  to  hand 
in  the  Eastern  States,  and  probably  very  little  in  any  part  of  the  country  east 
of  the  Rocky  Mountains.  What  has  become  of  all  this  gold?  Is  it  hoarded 
or  has  it  been  melted  down?  If  the  latter,  the  state  of  affairs  is  most,  seri- 
ous, since  it  would  lead  to  the  conclusion  that  fully  the  entire  annual  gold- 
product  of  the  world  is  absorbed  for  other  than  monetary  purposes. 
32 


498  APPLICATIONS  OF  ECONOMIC  SCIENCE.          [V.  83. 

such  a  case,  by  Grcsham's  law,  the  owners  of  gold  coin  will 
no  longer  use  it  wholly  as  money,  but  will  begin  to  use  it  for 
other  purposes.  The  converse  will  hold  true  if  silver  becomes 
more  valuable  in  the  market. 

On  the  other  hand,  the  monometallist  is  at  fault  if  he 
claims,  without  proof,  that  under  the  bimetallic  system  either 
all  the  silver  or  all  the  gold  necessary  for  the  world's  circula- 
tion could  be  coined  without  changing  the  market  ratio  of  the 
two  metals.  Let  us  suppose  the  two  metals  to  be  circulating 
as  money  in  equal  quantities  on  a  universal  bimetallic  system. 
Then  grant  that  one  of  them,  say  silver,  is  produced  in  such 
excess  as  to  cause  a  fall  in  its  market  price.  Before  it  can 
entirely  take  the  place  of  gold  in  the  circulation,  enough  of 
the  excess  must  be  coined  to  replace  all  the  gold  now  in  use 
as  money,  and  an  equal  value  of  the  latter  must  be  withdrawn 
from  circulation.  It  is  certain  that  this  cannot  be  done  with- 
out some  change  in  the  market  value.  Whether  the  change 
would  be  such  as  to  keep  the  market  ratio  of  the  two  metals 
down  to  the  legal  ratio  would  depend  upon  how  great  was  the 
excess  of  silver  production  compared  with  the  amount  which 
would  be  absorbed  in  the  coinage.  This  involves  questions  of 
fact,  to  be  settled  by  learning  the  actual  state  of  the  case. 

33.  The  whole  question  turns  upon  how  the  influence  of 
the  demand  for  the  precious  metals  for  other  purposes  than 
that  of  money  compares  with  the  influence  of  their  demand 
for  the  purposes  of  coinage.  To  consider  the  question  from 
this  point  of  view  we  must  first  point  out  a  great  difference 
between  what  constitutes  the  supply  of  the  precious  metals 
and  what  constitutes  the  supply  of  most  other  commodities. 
As  we  have  hitherto  used  the  term  supply,  it  has  meant 
the  quantity  of  a  commodity  brought  to  market  during  some 
definite  unit  of  time,  commonly  a  year.  The  reason  of  this  is 
that  nearly  all  commodities  reach  the  hands  of  the  persons 
who  are  finally  to  enjoy  them,  and  are  thus  out  of  the  market, 
within  a  comparatively  brief  period  of  their  production.  Most 


V.  34.]  MONOMETALLISM  AND  BIMETALLISM.  499 

of  the  wheat,  clothing,  and  furniture  manufactured  is  sold,  and 
in  the  hands  of  some  person  who  is  keeping  it  for  his  use, 
within  a  year  of  its  final  production.  In  the  case  of  more 
permanent  objects,  such  as  houses  and  farms,  although  they 
may  be  in  the  possession  of  persons  owning  and  using  them, 
they  are  still  to  a  certain  extent  in  the  market  for  sale  or  rent, 
so  that  the  supply  is  not  strictly  an  annual  one.  In  the  case 
of  the  precious  metals  the  supply  is  yet  more  permanent,  be- 
cause so  long  as  they  are  used  as  money  they  never  get  into 
any  hands  which  are  going  to  keep  them,  but  remain  con- 
tinually in  the  market. 

Hence  the  supply  of  gold  dollars  does  not  consist  of  those 
which  have  just  been  coined  from  the  mint  and  are  waiting  to 
be  paid  out,  nor  of  those  coined  within  a  year,  but  of  the 
entire  mass  of  gold  dollars  in  the  country  and  in  the  world. 
Among  the  gold  may  be  included  some  that  has  been  passing 
from  hand  to  hand  since  the  days  of  the  Caesars.  Thus  the 
actual  supply  of  the  precious  metals  is  vastly  greater  than  the 
amounts  annually  produced.  Hence  it  is  that  their  value  is 
less  dependent  upon  current  production  than  in  the  case  of 
any  other  commodity.  If  a  hundred  millions  is  extracted 
from  the  gold-mines  of  the  world  during  a  year,  it  is  only 
added  to  a  vastly  greater  existing  amount,  and  thus  produces 
little  difference  in  the  total  supply. 

34.  Let  us  return  to  the  definite  proposition  of  the  bimet- 
allists :  If  the  leading  nations  of  the  world  should  agree  to 
coin  silver  and  gold  icithout  limit  on  any  assumed  ratio,  the 
result  would  be  to  bring  the  market  ratio  down  to  that  of  the 
coinage. 

Let  us  see  whether  we  can  test  the  correctness  of  this  propo- 
sition. For  ten  years  past  the  market  ratio  has  very  generally 
been  about  18  : 1.  What  now  will  be  the  consequence  of  offer- 
ing to  every  owner  of  silver  the  privilege  of  having  it  coined 
into  money  which  shall  be  relatively  more  valuable  in  the  ratio 
cf  18:15?  Evidently  there  will  be  an  effort  on  the  part  of  the 


COO  APPLICATIONS  OF  ECONOMIC  SCIENCE.         [V.  84* 

owners  of  silver  to  get  it  coined,  while  gold  coinage  will,  for 
the  time,  cease.  The  demand  thus  created  will  increase  the 
value  of  silver  and  diminish  that  of  gold,  thus  lowering  the 
market  ratio.  Will  it,  as  the  bimetallist  claims,  lower  it  to  the 
ratio  15  \  Clearly  not,  because  if  it  did  there  would  no  longer 
be  any  incentive  to  take  it  to  the  mint  for  coinage.  The 
market  ratio  will  therefore  stand  somewhere  between  15  and 
18.  The  exact  point  at  which  it  would  stand  would  in  the  first 
place  depend  upon  the  capacity  of  the  mints  to  coin  a  con- 
siderable portion  of  the  existing  supply  of  silver  bullion.  The 
amount  of  this  supply  we  cannot  precisely  estimate,  but  it 
must  be  several  hundred  millions  of  dollars.  It  is  indeed  so 
large  that  the  coinage  since  1878  of  from  thirty  to  forty  mil- 
lions annually  by  the  United  States  Government  seems  to  have 
been  without  any  visible  effect  upon  the  silver  market.  It 
seems,  therefore,  safe  to  assume  that  were  the  bimetallic  theory 
tested,  all  the  mints  of  the  world  would  be  employed  to  their 
utmost  capacity  for  a  period  of  several  years  in  coining  silver. 

Now  consider  the  case  of  gold.  The  same  reasons  which 
would  stimulate  the  coinage  of  silver  would  entirely  paralyze 
that  of  gold.  Thus  the  annual  supply  of  the  latter  metal  would 
be  thrown  upon  the  market  for  use  in  the  arts  and  manufac- 
tures. To  what  extent  would  this  lower  its  value  as  compared 
with  silver  ?  To  some  extent,  no  doubt ;  but  we  cannot  tell  to 
what  extent  without  more  knowledge  than  we  have  of  the 
actual  amount  of  gold  in  the  world  and  the  actual  demand  for 
other  purposes  than  that  of  coinage. 

"Would  the  exclusive  coinage  of  silver  be  continued  until  that 
metal  alone  was  the  basis  for  the  money  of  the  whole  world  ? 
This  would  depend  upon  whether  all  the  silver  in  the  market, 
and  all  that  could  be  produced  and  taken  to  the  mints  during 
the  few  years  that  the  coinage  was  going  on,  would  suffice  for 
the  money  of  the  world.  We  do  not  know  whether  it  would 
suffice  or  not,  and  thus  we  do  not  know  exactly  what  the  out- 
come would  be.  We  could  learn  by  a  statistical  investigation, 
but  even  that  might  not  convince  the  contending  parties. 


V.  35.]         THE  REGULATION  OF  THE  CURRENCY.  501 


CHAPTER  Y. 

THE  REGULATION  OF  THE  CURRENCY. 

35.  THE  question  whether  government  ought  to  make  any 
provision  whatever  for  regulating  the  currency,  beyond  pro- 
tecting each  individual  against  fraud  or  other  wrong  on  the 
part  of  those  with  whom  he  deals,  is  an  open  one.  The  general 
principles  involved  in  this  question  have  already  been  so  fully 
discussed  that  they  need  not  be  further  considered  at  present. 
In  whichever  way  we  decide  the  question,  the  fact  will  remain 
that  governments  do  sometimes  undertake  to  issue  currency, 
and  to  enact  laws  for  its  regulation.  How  strongly  soever  the 
student  may  be  opposed  to  any  such  action  on  the  part  of  the 
government,  it  is  very  essential  that  he  should  be  able  to  trace 
the  effects  of  the  causes  which  may  be  brought  into  play  by 
such  action.  Our  discussion  will  not,  however,  bo  confined  to 
government  action,  but  will  include  the  effect  of  such  policies 
as  may  be  adopted  by  the  banks  of  the  country. 

To  form  a  clear  conception  of  the  subject,  certain  principles 
laid  down  in  the  first  few  chapters  of  the  preceding  book  are 
to  be  borne  clearly  in  mind.  It  has  been  shown : 

I.  That  a  regular  process  of  transfer  of  goods  and  services, 
which  we  have  called  the  industrial  circulation,  is  always  going 
on,  and  is  most  necessary  to  human  well-being. 

II.  That  all  such  transfers  of  goods  and  services  have  to  be 
balanced  by  a  transfer  of  current  money  in  the  opposite  direc- 
tion, thus  constituting  a  system  of  exchange. 

III.  That  the  money  or  credit  passing  in  one  direction  must 
measure  the  value  of  the  goods  or  services  passing  in  the  other 
direction.     At  the  same  time,  the  number  of  dollars  of  money 
or  credit  required  for  this  measure  depends  upon  tho  scale  of 
prices,  increasing  or  diminishing  with  that  scale. 


502  APPLICATIONS  OF  ECONOMIC  SCIENCE.          [V.  85. 

IV.  Since  the  scale  of  prices  cannot  be  fixed  by  any  law,  but 
is  always  a  matter  of  individual  bargaining,  it  follows  that  we 
cannot  assign  any  definite  quantity  of  money  which  shall  be 
necessary  or  sufficient  to  effect  all  the  exchanges  of  a  country. 
If  a  certain  volume  of  currency  is  required  to  transact  the 
business  of  the  country  on  a  certain  scale  of  prices,  then  if  all 
prices  are  doubled,  the  volume   of  currency   must  also  be 
doubled,  or  only  half  the  exchanges  can  be  effected.     Conse- 
quently what  is  really  wanted  to  keep  business  going  at  its 
normal  rate  is  a  fixed  relation  between  the  scale  of  prices  and 
the  volume  of  the  currency. 

V.  If  from  any  cause  whatever  the  volume  of  the  currency 
does  not  correspond  to  the  scale  of  prices,  that  fact  is  made 
known  to  the  public  through  an  apparent  excess  or  deficiency 
in  the  flow  of  the  currency.     A  deficiency  in  the  flow  is  shown 
by  merchants  not  being  able  to  sell  their  goods  at  the  regular 
rate,  and  by  the  laborers  of  the  community  not  being  able  to 
find  employment  at  regular  wages.     All  this  will  result  in  a 
diminution  of  wages  and  prices.     An  excess  in  the  flow  of  the 
currency  is  shown  by  a  brisk  purchase  of  goods,  and  by  such  a 
demand  for  labor  that  laborers  are  able  to  command  an  increase 
of  money  wages. 

VI.  The  apparent  advantages  and  disadvantages  thus  arising 
are,  however,  in  great  part  illusory,  from  the  fact  that  what  the 
laborer  loses  by  lower  wages  he  gains  by  getting  his  sustenance 
at  lower  prices,  and  vice  versa. 

VII.  Nevertheless,  owing  to  the  difficulty  of  adjusting  prices 
to  variations  in  the  flow  of  the  currency,  it  is  very  essential  to 
the  public  good  that  the  general  scale  of  prices  should  be  kept 
as  nearly  uniform  as  possible  from  year  to  year.     This  requires 
that  the  flow  of  the  currency  shall  always  be  accommodated  to 
the  industrial  flow,  increasing  when  the  latter  increases,  and 
diminishing  when  it  diminishes.     At  the  same  time  it  is  a 
serious  question  whether  the  sum  total  of  the  industrial  flow 
is  subject  to  much  variation  from  month  to  month  when  every- 
thing goes  along  at  its  normal  rate.     It  is  sometimes  supposed 


V.36.]         THE  REGULATION  OF  THE  CURRENCY.  503 

by  men  in  business  that,  at  a  certain  period  of  each  year,  the 
"  moving  of  the  crops  "  causes  a  great  increase  in  the  industrial 
flow,  requiring  for  its  compensation  a  corresponding  increase 
in  the  monetary  flow.  Quite  likely  this  may  be  true ;  and  if  it 
is,  we  have  an  example  of  a  case  in  which  a  certain  elasticity  of 
the  currency  is  required. 

It  follows  from  all  this  that  if  the  regulation  of  the  cur- 
rency is  to  be  regarded  as  something  for  either  governments 
or  banks  to  undertake,  the  main  problem  involved  is  that  of 
adjusting  the  monetary  to  the  industrial  flow.  There  must 
be  some  way  by  which,  when  the  industrial  flow  increases,  an 
increased  volume  of  currency  shall  be  drawn  into  the  circula- 
tion, to  be  retired  again  when  the  occasion  for  it  has  passed. 
To  effect  this  adjustment  is  supposed  to  be  one  of  the  principal 
functions  of  banks.  When  more  currency  is  wanted,  it  is  sup- 
posed that  merchants  will  apply  to  the  banks  for  loans,  thus 
increasing  the  volume  of  currency,  and  hence  the  monetary 
flow.  When  the  occasion  for  the  increase  has  passed  away,  the 
merchants  pay  off  their  loans,  and  thus  the  volume  and  flow  of 
the  currency  are  diminished. 

Whether  banks  always  do  perform  their  functions  so  as  to 
make  this  adjustment  is  a  question  which  economists  should  in- 
vestigate more  fully  than  they  have  hitherto  done.  It  should 
not  be  regarded  by  the  student  as  a  settled  one,  but  as  one 
which  it  should  be  his  business  seriously  to  examine.  Our 
present  object  is  to  assist  him  by  suggesting  some  ideas  and 
discussing  some  theories  which  will  come  into  play  in  the  in- 
vestigation. 

36.  One  of  the  advantages  of  banks  has  been  supposed  to 
be  that  of  economizing  the  use  of  gold  and  silver.  If  the  lat- 
ter were  alone  used  as  currency,  we  should  have  a  capital  equal 
to  the  whole  volume  of  the  currency  lying  idle  and  gaining  no 
interest.  If  one  has  a  twenty-dollar  gold  piece  in  his  purse, 
he  necessarily  loses  the  interest  upon  it  as  long  as  he  keeps 
it.  The  same  is  true  of  the  man  to  whom  he  transfers  it. 


504  APPLICATIONS  OF  ECONOMIC  SCIENCE.          [V.  86. 

Tho  same  is  true  of  every  piece  of  coined  money  issued  from 
the  mint.  Thus  in  a  certain  sense  the  whole  stock  of  coined  gold 
and  silver  may  be  regarded  as  so  much  idle  capital.  The  cur- 
rent theory  is  that  in  so  far  as  this  gold  and  silver  is  replaced 
by  bank-notes,  so  far  is  interest  gained  on  that  portion  of  the 
capital  of  the  country  which  is  in  use  as  money.  Adam  Smith 
compared  the  necessity  of  employing  this  dead  capital  to  that 
of  taking  a  certain  portion  of  the  land  of  the  country  for  roads, 
and  then  likened  the  substitution  of  bank-notes  for  the  gold 
and  silver  to  the  construction  of  a  road  through  the  air,  which 
would  permit  the  land  previously  occupied  by  roads  to  be  cul- 
tivated, thus  making  an  actual  addition  to  the  productive 
wealth  of  the  country. 

But  this  theory  is  at  the  best  far  from  satisfactory.  Who 
gains  by  this  substitution  ?  Every  holder  of  a  circulating  note 
loses  interest  on  his  investment  in  that  note  while  it  stays  in 
his  pocket,  unless  it  bears  interest,  which  bank-notes  never  do. 
Therefore  the  holder  of  a  bank-note  loses  the  interest  as  com- 
pletely as  if  he  had  coin  instead  of  the  note.  What  is  really 
saved  by  the  substitution  is  the  wear  and  tear  of  the  gold  and 
silver  coin.  In  consequence  of  this  wear  and  tear,  all  such 
coin  is  subject  to  a  slight  continuous  loss,  which  the  public 
must  bear  when  the  coin  becomes  too  light  for  circulation. 
We  may  consider  each  man's  share  of  that  loss  to  be  equal  to 
the  wear  and  tear  of  the  coin  while  it  is  in  his  pocket. 

Therefore  whatever  gains  result  from  the  substitution  of 
bank-notes  for  coin  must  accrue  to  the  benefit  of  the  banks 
or  other  issuer  of  the  notes.  If  they  gained  more  than  the 
regular  interest  on  their  invested  capital,  there  would  be  an 
actual  gain  to  the  public  by  the  issue  of  notes.  It  may  be 
questioned,  however,  whether  they  do  have  any  such  extra 
gain.  The  general  rule  probably  is  that  the  expenses  incident 
to  the  issue  of  the  notes,  and  the  management  of  the  business, 
absorb  all  the  profits. 

Here  a  very  important  point  is  to  be  considered.  We  may 
readily  believe  that  if  all  the  circulating  notes  of  the  country 


V.87.]          THE  REGULATION  OF  THE  CURRENCY.  5Q5 

were  issued  from  a  single  central  institution,  a  not  inconsider- 
able profit  could  be  made  by  that  institution  out  of  the  busi- 
ness. For  example,  there  are  now  circulating  in  the  United 
States  about  600  million  dollars  in  government  and  bank 
notes.  If  we  subtract  25  per  centum  of  this  as  a  coin  reserve 
to  be  held  for  their  payment,  there  will  remain  450  millions, 
on  which  the  issuing  authority  could  gain  interest.  Putting 
this  interest  at  3^-  per  cent  per  annum,  the  amount  gained 
would  be  15  millions  per  annum.  This  would  no  doubt  more 
than  pay  all  the  expenses  of  the  issue,  were  it  made  by  only 
a  single  institution.  But  when  made  by  several  hundred  banks, 
each  separately  responsible  for  its  own  share,  the  expense  is  so 
far  increased  that  most  of  the  banks  find  little  or  no  advan- 
tage from  the  issue.  The  government  gains  an  advantage  from 
its  issue  of  notes  by  having  these  notes  form  a  part  of  the  pub- 
lic debt  on  which  no  interest  is  paid. 

37.  Another  consideration  is  that  the  continually  increas- 
ing volume  of  credit  used  instead  of  coined  money  has  resulted 
in  the  general  volume  of  circulation  for  the  world  being  sev- 
eral times  larger  than  it  would  have  been  had  bank  credits  not 
been  used  as  money.  Since,  as  already  pointed  out,  this  whole 
volume  of  currency  is  necessary  to  the  transaction  of  the 
world's  business  on  the  present  scale  of  prices,  it  follows  that 
our  present  scale  is  much  higher  than  it  would  have  been  but 
for  the  employment  of  credit-currency. 

The  fact  is  that  the  world's  business,  or,  as  we  have  called  it, 
the  world's  industrial  circulation,  has  grown  much  more  rap- 
idly than  its  stock  of  coin.  The  result  of  this  is  that  the  mon- 
etary and  industrial  flows  could  not  have  been  balanced  with- 
out a  continuous  fall  of  prices,  but  for  the  use  of  credit-cur- 
rency. The  use  of  this  currency  has  resulted  in  the  whole 
gold-supply  not  being  necessary  to  the  transaction  of  business. 
In  consequence,  a  considerable  portion  of  the  gold-supply  has 
been  available  for  other  purposes  than  that  of  money ;  watches, 
jewelry,  and  picture-frames,  for  example.  We  arc  therefore  to 


506  APPLICATIONS  OF  ECONOMIC  SCIENCE.          [V.  88. 

regard  our  ability  to  command  these  articles  of  luxury  as  being 
.due  in  a  great  measure  to  the  economy  introduced  by  the  credit 
system.  The  general  benefits  to  the  country  rendered  by  the 
credit  system  are  therefore  that  an  increased  business  is  trans- 
acted without  an  increased  scale  of  prices,  and  that  an  impor- 
tant part  of  the  world's  supply  of  the  precious  metals  has  been 
available  for  use  in  manufactures  and  the  arts. 

38.  Irredeemable  Paper  Money.  The  kind  of  circulating 
notes  which  we  have  hitherto  considered  have  been  those  en- 
titling the  holder  to  receive  a  certain  amount  of  coin  at  the 
counter  of  a  bank.  They  are  in  fact  nothing  but  promissory 
notes,  payable  on  demand,  and  deriving  their  value  from  the 
ability  of  the  bank  to  pay  them  whenever  presented.  It  has, 
however,  been  shown  that  the  transaction  of  the  business  of  the 
country  requires  a  certain  volume  of  currency  to  be  continually 
in  a  state  approximating  to  that  of  flow,  being  held  first  by 
one  person  and  then  by  another.  In  other  words,  it  is  passing 
from  hand  to  hand,  and  is  received  by  one  person  only  to  be 
paid  to  another.  Now,  so  far  as  the  immediate  results  are  con- 
cerned, it  makes  no  -difference  to  the  payers  and  receivers 
whether  the  money  thus  flowing  is  coin,  bank-notes,  or  credit. 
Hence  a  certain  amount  of  money  will  always  remain  in  circu- 
lation, and  if  it  is  credit-money,  the  payment  of  the  credit  in 
coin  may  never  be  demanded. 

The  result  of  this  state  of  things  is  that  when  a  government 
is  in  a  difficulty,  or  is  financially  weak,  it  may  issue  a  limited 
volume  of  its  own  notes  with  the  reasonable  assurance  that 
they  will  pass  for  a  certain  time  from  hand  to  hand  without 
the  holders  demanding  payment.  By  the  device  of  making 
them  a  legal  tender  a  forced  circulation  is  given  them,  quite 
irrespective  of  their  money  value,  or  of  the  power  of  the  gov- 
ernment to  redeem  them.  If  the  volume  issued  becomes  so 
great  that  the  notes  depreciate,  then,  in  accordance  with  Gresh- 
am's  law,  they  will  displace  all  other  good  notes,  or  credit  re- 
deemable in  coin,  and  thus  may  become  the  basis  of  the  entire 


V.89.]          THE  REGULATION  OF  TUB  CURRENCY.  5Q7 

circulating  medium  of  the  country.  Such  notes  are  sometimes 
called  paper  money.  Such  money  was  the  "  greenbacks  "  of 
the  United  States  issued  during  the  civil  war,  the  redemption 
of  which  in  coin  was  not  formally  undertaken  until  1879. 

39.  The  possibility  of  a  system  of  irredeemable  paper  mon- 
ey being  a  subject  of  public  discussion,  it  is  necessary  that  we 
should  have  a  clear  understanding  of  the  laws  which  regulate 
its  value  and  adaptability.  On  this  subject  two  opposite  opin- 
ions are  current.  One  opinion  is  that  such  currency  would 
perform  all  the  functions  of  a  circulating  medium,  if  the  gov- 
ernment would  only  issue  it,  and  call  its  units  by  the  name  of 
dollars.  After  the  commercial  panic  of  1873  a  political  party 
was  formed  in  many  States  of  the  Union,  the  object  of  which 
was  to  make  the  circulating  notes  issued  by  the  government 
forever  irredeemable  in  coin.  The  existing  notes  were  prom- 
ises to  pay  the  bearer  the  amounts  named  on  their  faces ;  but 
by  common  consent  the  government  was  postponing  the  re- 
demption of  this  promise  until  a  more  convenient  season.  Gen- 
eral B.  F.  Butler,  one  of  the  leaders  of  the  new  party,  saw  the 
absurdity  of  having  a  promise  afloat  which  might  never  be  per- 
formed, and  therefore  proposed  that  the  notes,  instead  of  bear- 
ing such  a  promise,  should  be  declared  money  in  themselves, 
and  called  certificates  of  value.  Then  a  dollar  note  would  be 
simply  a  piece  of  engraved  paper  issued  by  the  government 
and  bearing  on  its  face  a  certificate  that  it  was  really  one  dollar 
and  should  be  legal  tender  to  that  amount  for  all  payments 
made  under  the  laws  of  the  United  States.  This  view  was  the 
strictly  logical  consequence  of  the  theory  already  discussed, 
that  money  derives  its  value  from  the  fiat  of  the  government. 
The  reader  may  be  supposed  so  well  able  to  grapple  with  this 
theory  that  we  shall  leave  him  untrammelled  in  its  discussion. 

The  opposing  theory  is  that  an  irredeemable  paper  money 
has  no  value  except  that  which  it  derives  from  the  hope  of  be- 
ing redeemed  at  some  future  time.  Hence  the  more  remote 
the  process  of  redemption  the  less  the  value.  This  view  might 


508  APPLICATIONS  OF  ECONOMIC  SCIENCE.          [V.  40. 

appear  to  be  borne  out  by  the  facts  of  history.  The  general 
rule  has  been  that  such  notes  are  issued  only  by  governments  in 
difficulties,  and  in  such  quantities  that  their  redemption  be- 
comes more  and  more  doubtful.  Thus  the  assignats  of  the 
French  Revolution,  the  "  Continental  currency"  issued  by  our 
own  government  during  the  Revolutionary  War,  and  the  cir- 
culating notes  of  the  Southern  Confederacy,  all  became  value- 
less as  it  became  certain  that  they  would  not  be  redeemed. 

4O.  Although  this  view  is  nearer  the  truth  than  the  other, 
it  is  not  entirely  sound.  Under  certain  conditions  an  irredeem- 
able paper  currency  may  have  the  value  and  perform  the  func- 
tions of  money,  although  it  is  certain  that  it  will  never  be  re- 
deemed. What  these  conditions  are  may  be  learned  from  the 
principles  already  developed  in  treating  of  the  volume  and 
flow  of  the  currency. 

We  have  seen  that  it  is  absolutely  necessary  to  the  transac- 
tion of  the  business  of  the  country  that  a  certain  volume  of 
currency  should  be  in  circulation.  It  is  impossible  that  the 
exchanges  of  the  United  States  should  be  conducted  without  a 
volume  of  currency  the  value  of  which,  measured  by  our  pres- 
ent standard,  would  be  about  fifteen  dollars  for  each  inhabitant. 
Hence,  whatever  bills  or  tokens  the  people  use  in  making  their 
exchanges,  it  is  certain  that  so  long  as  the  exchanges  go  on, 
the  total  volume  of  those  bills  or  tokens  will  have  a  certain 
absolute  value.  It  follows  that  the  first  essential  condition  of 
value  of  a  paper  currency  is  that  it  shall  be  generally  accepted 
in  trade  as  money.  It  must  therefore  either  be  a  legal  tender 
by  law,  or  received  so  generally  as  a  matter  of  custom  that  it 
will  be  refused  only  in  exceptional  cases.  In  times  of  great 
popular  excitement  the  force  of  public  opinion  alone  suffices 
to  give  a  forced  circulation  to  such  money. 

The  money  being  universally  accepted,  the  next  condition  on 
which  its  value  depends  is  its  total  amount.  If  strictly  limited 
to  an  amount  not  exceeding  that  required  for  the  transaction 
of  the  current  business  of  the  community,  it  will  not  depreciate. 


V.40.]         THE  REGULATION  OF  TEE  CURRENCY.  509 

Here,  however,  a  question  will  arise  in  the  mind  of  the  crit- 
ical student.  It  has  been  shown  in  a  preceding  chapter  that 
there  is  no  definite  volume  of  currency  necessary  to  transact 
the  business  of  the  country,  and  that  this  business  can  be  as 
well  transacted  with  one  volume  as  with  another,  always  pro- 
vided that  the  scale  of  prices  is  adjusted  to  the  volume.  The 
expression,  "  amount  of  currency  required  to  transact  the  busi- 
ness of  the  country,"  therefore  needs  to  be  precisely  defined. 

We  start,  then,  with  the  proposition  that  whatever  be  the 
volume  of  irredeemable  currency,  it  will  fulfil  all  the  functions 
of  a  circulating  medium  on  a  certain  scale  of  prices  correspond- 
ing to  its  volume.  If  the  volume  is  less  than  fifteen  dollars  for 
each  inhabitant,  this  scale  of  prices  will  be  below  prices  in  gold. 
If  gold  coin  were  not  receivable  as  money,  it  would  then  be  at 
a  positive  discount  as  compared  with  the  paper  money  which 
we  suppose  to  be  so  receivable.  But  being  receivable,  we 
should,  in  the  case  supposed,  have  a  mixed  currency  of  paper 
and  gold.  If  we  continually  add  to  the  volume  of  the  paper 
currency,  it  will  at  length  amount  to  fifteen  dollars  for  each  in- 
habitant, and  will  then  suffice  to  transact  all  the  business  of  the 
country  on  the  gold  scale  of  prices.  If  we  add  still  further  to 
the  volume,  gold  will  entirely  disappear  from  circulation,  and 
will  be  at  a  premium,  in  accordance  with  (jresham's  law.  With 
every  further  addition  there  will  be  a  further  depreciation : 
doubling  the  volume  will  simply  double  all  prices  as  measured 
by  currency.  To  speak  more  accurately,  the  standard  of  meas- 
ure, or  the  dollar,  will  be  reduced  to  one  half  its  value.  The 
theorem  just  enunciated  may  therefore  be  expressed  witli 
greater  precision,  as  follows:  So  long  as  the  total  volume  of 
irredeemable  currencies  of  all  kinds  does  not  exceed  that  neces- 
sary to  transact  the  business  of  the  country  on  a  coin  scale  of 
prices,  so  long  the  currencies  will  not  depreciate. 

It  follows,  therefore,  that  could  a  strictly  limited  volume  of 
irredeemable  paper  currency  be  issued,  it  would  perform  all 
the  functions  of  money.  Unfortunately,  as  human  nature  is 
constituted,  the  experiment  of  such  an  issue  would  be  a  very 


510  APPLICATIONS  OF  ECONOMIC  SCIENCE.          [V.  41. 

dangerous  one.  The  experiment  can  at  present  have  no  object 
but  that  of  making  money  more  plentiful,  and  the  more  plen- 
tiful we  make  it  the  higher  prices  will  be,  and  the  greater  the 
volume  of  currency  that  will  be  required  to  transact  the  busi- 
ness of  the  country.  Hence  the  same  reason  which  will 
prompt  one  issue  will  lead  to  another,  and  so  on  until  the 
whole  fabric  collapses  in  ruin. 

41.  The  regulation  of  the  currency  through  the  action  of 
banks  is  seen  at  its  best  in  the  working  of  the  Bank  of  Eng- 
land. The  criterion  by  which  the  governors  of  this  institu- 
tion judge  of  the  state  of  the  currency  is  simply  the  demand 
for  gold  from  their  vaults.  The  bank  has  a  variable  volume  of 
credit  outstanding,  payable  to  its  creditors  on  demand,  either 
in  bank-notes  or  in  coin.  Since  the  bank-notes  are  themselves 
payable  in  coin,  this  whole  mass  of  credit  is  thus  payable. 

The  object  which  the  governors  keep  before  them  is  to  allow 
the  mass  of  credit  to  be  as  large  as  is  consistent  with  entire  se- 
curity against  such  a  withdrawal  of  coin  as  might  endanger 
their  ability  to  make  good  all  their  obligations  on  demand. 
The  instrumentality  through  which  they  regulate  the  volume 
of  their  credits  is  the  rate  of  interest.  When  the  demand  for 
coin  by  their  creditors  exceeds  the  deposits  of  coin,  they  know 
that  it  is  being  withdrawn  for  export.  They  conclude,  there- 
fore, that  there  is  a  larger  volume  of  credit  in  circulation  than 

*  o 

is  necessary  for  the  transaction  of  the  home  business  on  the  ex- 
isting scale  of  prices.  They  therefore  raise  the  rate  of  interest 
on  loans.  The  result  of  this  is  that  their  customers  are  dis- 
couraged from  borrowing,  and  thus  a  moral  force  is  brought 
into  play  which  tends  to  diminish  the  volume  of  credit  cur- 
rency. This  checks  the  ability  of  the  public  to  pay,  and  so 
lessens  the  demand  for  goods.  The  system  may  therefore  be 
considered  as  acting  much  like  the  governor  of  a  steam-engine, 
which  closes  the  throttle-valve  as  soon  as  the  engine  begins  to 
go  too  fast,  and  opens  it  again  when  the  speed  is  reduced  to 
the  proper  limit. 


V.43.]          THE  REGULATION  OF  TIIE  CURRENCY. 

In  the  United  States  the  banks  were  long  prevented  from 
performing  this  function  in  the  same  manner  through  the 
existence  among  us  of  an  idea  which  has  come  down  to  us 
from  the  dark  ages,  that  the  rate  of  interest  should  be  limited 
by  law.  The  national  banks  are  prohibited  from  charging  a 
higher  rate  than  the  laws  of  the  State  in  which  they  are  lo- 
cated. This  limiting  rate  varies  from  six  to  ten  per  cent. 
Owing  to  the  great  fall  in  the  rate  of  interest  since  1875, 
this  restriction  has  practically  ceased  to  do  any  mischief,  since 
the  market  rate  would  seldom  exceed  that  fixed  by  law.  Un- 
der the  system  of  the  Bank  of  England,  and  of  all  banks  un- 
restricted by  usury  laws,  the  credit  is  allowed  to  the  person 
who  will  pay  the  highest  rate  of  interest,  regard  being  had,  of 
course,  to  the  security  which  he  offers.  In  the  case  of  banks 
restricted  by  such  laws,  if,  at  the  maximum  rate  allowed  by 
law,  the  demand  for  credit  exceeds  that  which  the  banksman 
supply,  loans  become  a  matter  of  favor,  and  the  banks  give  the 
preference  to  those  who  have  been  its  best  customers.  The 
result  is  that  the  unfavored  part  of  the  community  cannot  get 
money  at  any  price  whatever. 

42.  The  effect  of  the  method  of  regulation  which  we  have 
described  is  to  keep  the  general  scale  of  prices  somewhere  near 
the  average  gold  prices  of  the  world  at  large.  It  is  one  of  the 
unsettled  questions  of  political  economy  whether  this  system 
of  regulation  is  really  of  any  benefit  to  the  public.  It  may  be 
held  that  banks  really  foster  injurious  changes  in  the  general 
scale  of  prices  at  the  moment  when  those  changes  are  most  se- 
verely felt,  namely,  in  times  of  commercial  panic  and  depression. 
These  are  the  times  when  the  flow  of  the  currency  least  suf- 
fices to  transact  the  business  of  the  country,  but  they  are  also 
the  times  when  banks  are  compelled  to  bo  most  careful  in 
making  loans.  What  is  wanted  is  some  source  of  currency 
which  shall  bo  available  only  when  a  commercial  panic  is 
threatened.  Plans  for  this  can  be  discussed  with  advantage 
when  the  public  are  more  enlightened  on  general  principles. 


512  APPLICATIONS  OF  ECONOMIC  SCIENCE.          [V.  43. 


CHAPTER  VI. 

OF   SOCIALISTIC   IDEAS. 

43.  THERE  are  men  who  hold  that  the  present  organization 
of  society  is  not  that  best  adapted  to  promote  the  general  wel- 
fare. These  men  are  so  numerous,  and  so  frequently  heard, 
that  their  views  demand  the  careful  attention  of  the  student. 
To  see  in  what  respect  it  is  proposed  to  change  the  existing 
system,  we  remark  that  the  fundamental  principle  of  the  latter 
is  that  of  individual  liberty,  or  individualism"  not  indeed  un- 
limited liberty,  but  liberty  within  certain  limits  laid  down  by 
law.  To  put  the  principle  into  another  shape,  every  man  is  re- 
garded as  the  master  of  his  own  destiny.  This  is  the  under- 
lying idea  of  the  let-alone  principle. 

Socialism  is  a  general  term  applied  to  a  number  of  systems 
which  propose  that  society,  by  organized  action,  shall  force  the 
individual  to  surrender  his  liberty,  or,  what  amounts  to  the  same 
thing,  his  right  to  the  unconditional  acquisition  and  use  of 
property,  for  the  general  good.  These  systems  are  founded 
on  the  belief  that  the  great  inequality  now  seen  in  the  distri- 
bution of  wealth  should  be  lessened,  and  that  an  effort  should 
be  made  to  effect  this  distribution  on  certain  supposed  princi- 
ples of  equity.  Such  views  find  very  strong  support  in  the 
philanthropic  sentiments  of  mankind.  There  is  a  single  man 
in  New  York  whose  income  would  suffice  to  feed  and  clothe 
fifty  thousand  families.  In  that  same  city  there  are  more  than 
that  number  of  families  working  hard  to  make  both  ends  meet, 
and  a  very  considerable  number  living  in  squalor  and  misery. 
On  a  superficial  view  there  is  no  apparent  difference  between 
the  constitution  of  this  rich  man  and  of  his  poorer  neighbors 
which  would  justify  such  inequality  in  the  wealth  they  possess. 
It  is  therefore  natural  to  suppose  that  a  system  which  would 


Y.  44.]  OF  SOCIALISTIC  IDEAS.  513 

distribute  his  surplus  wealth  among  the  poor  and  unfortunate 
would  tend  to  the  general  good. 

In  connection  with  socialism  we  have  to  consider  the  view  of 
the  "labor  party,"  the  members  of  which  do  not  call  them- 
selves socialists,  and  do  not  propose  any  radically  new  system, 
but  are  simply  engaged  in  a  vigorous  effort  to  secure  for 
the  laborer  a  larger  share  of  the  product  of  labor  than  he  can 
command  under  the  actual  system.  Although  this  class  has 
no  system  of  its  own,  it  has  a  certain  way  of  thinking  which 
is  so  nearly  identical  with  the  way  of  thinking  of  the  socialists 
proper  that  both  may  be  considered  together.  The  object  of 
the  present  chapter  is  to  inquire  whether  any  system  intended 
to  limit  the  liberty  of  any  man  to  acquire  all  the  wealth  he  can 
by  legal  means,  and  to  employ  it  in  the  way  he  chooses,  can  con- 
duce to  the  general  good. 

44.  "We  have  in  the  first  place  to  point  out  certain  wide- 
spread popular  errors  which  lead  to  the  impression  that  our 
present  system  is  not  that  most  conducive  to  the  public  good. 
The  mere  correction  of  these  errors  will  go  far  towards  putting 
us  on  the  right  track,  and  will  make  it  less  necessary  than  it 
otherwise  would  be  to  consider  the  views  of  socialists  in  detail. 

The  first  error  is  that  of  tacitly  supposing  that  the  inequality 
now  existing  in  the  ownership  of  wealth  indicates  a  correspond- 
ing inequality  in  its  enjoyment.  Let  us  suppose  the  income  of 
the  richest  man  in  New  York  to  be  ten  millions  of  dollars,  and 
that  of  each  day-laborer  to  be  five  hundred  dollars.  If  their 
consumption  of  the  products  of  labor  were  proportional  to 
their  income,  Mr.  Yanderbilt's  family  would  consume  annually 
perhaps  100,000  barrels  of  flour,  10,000  suits  of  clothes,  .and 
so  on ;  or  at  least  the  equivalent  in  value  of  these  quantities  of 
flour  and  clothing.  But  nothing  of  the  sort  takes  place.  The 
rich  consume  but  little  more  of  the  necessaries  of  life  than  the- 
poor.  All  that  the  wealthiest  man  gets  to  live  on  is  his  house, 
with  its  furniture  and  decorations,  the  food  he  eats,  the  clothes 
he  wears,  and  the  articles  which  contribute  to  his  comfort  and 
33 


514  APPLICATIONS  OF  ECONOMIC  SCIENCE.          [V.  44. 

convenience.  As  already  shown,  all  his  surplus  income  above 
this  is  not  consumed  by  him,  but  is  directly  or  indirectly  ex- 
pended in  employing  laborers  to  build  more  houses,  factories, 
mills,  railways  and  locomotives,  to  clear  more  farms  and  to  dig 
more  mines — in  a  word,  to  increase  the  general  supply  of  all 
the  commodities  required  by  men  in  general  (Book  IV., 
Chapter  IX.).  What  society  really  expends  in  the  support  of 
Mr.  Vanderbilt  is  only  the  commodities  which  he  takes  out  of 
the  general  storehouse  for  his  own  consumption. 

The  second  error  is  that  of  forgetting  that  under  the  existing 
system  each  individual  is  engaged  as  advantageously  as  circum- 
stances admit  of  in  the  production  of  the  necessaries  of  life  to 
be  consumed  by  others ;  and  that  no  change  in  that  system 
could  result  in  a  more  abundant  general  supply  of  the  neces- 
saries of  life.  The  utmost  that  could  be  done  by  the  change 
would  be  to  allow  some  classes  to  consume  more  and  others 
fewer  commodities. 

A  third  mistake  is  that  of  supposing  that  the  condition  of  the 
laboring  class  has  not  improved  with  the  advance  in  the  arts  of 
production  during  the  last  two  or  three  centuries.  This  mis- 
take is  about  a  matter  of  fact  so  clear  and  simple  that  its  mis- 
apprehension can  only  be  considered  as  an  extraordinary  case 
of  mental  blindness,  suggestive  of  the  danger  of  intrusting 
the  improvement  of  society  to  men  who  cannot  see.  Every 
one  who  has  taken  the  trouble  to  inquire  into  the  actual  state 
of  society  a  few  centuries  ago  knows  that  the  condition  of  the 
laborer  was  about  this  :  He  lived  in  a  hovel  with  hardly  any- 
thing which  we  would  call  a  window,  with  the  fire  (if  he  ever 
had  any)  in  the  middle  of  the  building,  or  perhaps  in  a  chimney- 
piece  at  one  end.  This  hovel  he  occupied  in  common  with  the 
pigs  and  poultry.  His  staple  article  of  food  was  a  kind  of  black 
bread  which  a  negro  of  to-day  would  hardly  offer  his  dog,  with 
a  few  vegetables  from  the  neighboring  garden.  The  clothing 
of  himself  and  wife  was  coarse,  scanty,  and  dirty  almost  in  the 
same  proportion. 

Coming  nearer  to  our  own  times  and  our  own  country,  we  have 


V.  44.]  OF  SOCIALISTIC  IDEAS.  515 

a  well-known  fact  still  within  the  memory  of  onr  older  men 
which  shows  the  improvement  in  the  comfort  of  the  poorer 
classes  in  a  yet  simpler  light.  In  the  early  part  of  this  cen- 
tury the  clothing  for  all  but  well-to-do  families  had  to  be 
made  by  the  female  members  of  each  family.  They  helped  to 
shear  the  sheep,  they  spun  the  wool,  wove  the  cloth,  and  cut 
and  sewed  the  clothes.  Such  clothing  was  called  "home- 
spun," a  term  familiar  even  to  the  present  day.  Coming  down 
to  the  present,  it  would  now  be  difficult  to  find  within  the  limits 
of  the  United  States  a  family  who  found  such  labor  necessary. 
The  wife  of  the  poorest  day-laborer  in  our  land  would  rebel  at 
the  task  of  spinning  and  weaving  the  material  for  her  hus- 
band's clothes.  "What  object  would  there  be  in  undertaking 
such  a  task,  when  with  the  wages  of  a  week's  labor  the  man 
can  buy  himself  a  ready-made  suit  of  clothes  which  will 
last  him  a  year  with  no  other  help  from  the  wife  than  mending 
and  sewing  on  buttons  ? 

D 

The  improvement  in  the  quantity  of  food  available  is  not 
less  remarkable  than  in  that  of  clothing.  Three  or  four  days' 
work  of  the  average  laborer  will  now  buy  him  a  barrel  of  flour 
and  more  than  a  barrel  of  corn-meal ;  that  is,  a  month's  supply 
of  bread  for  an  average  family.  A  week's  labor  will  buy 
him  a  half-barrel  of  pork. 

The  fourth  mistake  is  that  of  overlooking  the  relative  im- 
portance of  the  different  requirements  of  production,  and 
regarding  the  functions  of  the  laborer  as  the  only  ones  to  be 
considered.  This  is  an  exceedingly  natural  mistake.  When 
we  trace  back  the  operations  through  which  a  coat  or  any  other 
commodity  was  produced,  we  find  them  all  to  be  ultimately 
resolved  into  human  labor.  But  we  see  in  the  same  connection 
that  conjoined  with  the  merely  manual  labor,  which  was  the 
immediate  instrument,  there  were  other  agencies  of  equal  im- 
portance which  might  be  called  labor,  but  which  are  overlooked 
by  the  socialist  and  labor-reformer.  These  are  the  functions 
of  the  inventor  who  shows  how  improvements  in  production 
can  be  made :  of  the  capitalist  who  saves  up  his  income  and 


016  APPLICATIONS  OF  ECONOMIC  SCIENCE.          [V.45. 

employs  it  in  putting  the  ideas  of  the  inventor  into  practice ; 
of  the  managers  who  organize  the  work  of  the  laborers.  With- 
out these  three  classes  of  men  the  great  class  of  mere  laborers 
would  never  have  made  any  advance,  but  would  have  been  still 
living  in  the  same  miserable  style  that  they  lived  in  one  or 
two  hundred  years  ago.  That  is,  the  great  improvement  in 
the  condition  of  the  laborer  which  the  present  generation  wit- 
nesses is  not  the  work  of  himself,  but  of  men  of  a  higher  order. 

45.  The  fact  is  that  on  our  present  system  the  enjoyment 
of  the  collected  wealth  of  the  community  is  as  nearly  in  accord 
with  the  ideal  principles  of  equity  as  any  general  system  can 
be.  It  is  a  great  mistake  to  suppose  that  the  enormous  ine- 
qualities which  we  see  in  wealth  imply  anything  wrong  in  the 
system  which  permits  them.  "When  we  speak  of  principles  of 
equity,  we  mean  principles  which  have  their  rise  in  the  consti- 
tution of  human  nature.  At  the  bottom  of  all  these  principles 
is  one  which  we  have  already  several  times  alluded  to  or  de- 
fined: the  feeling  in  the  breast  of  every  well-organized  man 
that  he  is  entitled  to  make  the  best  use  of  the  faculties  with 
which  nature  has  endowed  him  for  his  own  advancement,  and 
that  so  long  as  he  gives  to  others  a  full  equivalent  for  the 
benefits  that  he  receives  from  them,  his  fellow-men  have  no 
other  claim  upon  him.  We  have  shown  that  under  our  present 
system  no  one  can,  as  a  general  rule,  command  from  others 
more  that  the  equivalent  of  the  good  he  does  them.  But  we 
may  explain  the  matter  again  from  a  somewhat  wider  point  of 
view. 

When  we  speak  of  equivalents  between  services  rendered  we 
presuppose  some  system  by  which  we  may  measure  the  values 
of  the  respective  services.  The  economic  measure  of  value 
already  defined  and  investigated  is  in  the  direction  of  equity. 
True,  they  result  in  the  value  of  the  service  being  measured 
not  merely  by  its  character  in  itself  considered,  but  by  its 
scarcity.  But  this  system  of  estimation  is  perfectly  equitable. 
To  a  man  who  kindly  offers  to  supply  me  with  several  hogs- 


V.  45.]  OF  SOCIALISTIC  IDEAS.  517 

heads  of  air  to  breathe,  I  may  say  with  perfect  reason,  "  I  have 
all  the  air  I  want  already,  and  your  services,  whatever  the  cost, 
are  of  no  nse  to  me.  I  therefore  decline  to  pay  you  for  the 
labor  you  have  spent  in  bringing  me  the  air." 

To  take  an  extreme  case  of  the  contrary  kind,  suppose  I  am 
defendant  in  a  suit  at  law,  the  loss  of  which  will  reduce  me  to 
penury.  If  a  lawyer  by  his  good  advice  shows  me  how  to  gain 
the  suit,  it  would  be  inequitable  and  unreasonable  should  I  say 
to  him,  "  These  services  cost  you  only  two  or  three  days'  labor 
all  told;  I  will  therefore  only  pay  you  the  value  of  two  or  three 
days  of  my  labor."  It  would  be  inequitable,  because  what- 
ever is  the  maximum  amount  which  I  would  be  willing  to  pay 
rather  than  be  deprived  of  his  advice,  that  maximum  repre- 
sents the  extreme  value  of  the  services  which  he  renders  me. 
So  far  as  we  two  are  concerned,  that  amount  represents  the 
good  which  he  does  me.  Therefore,  by  such  amount  as  that 
which  I  actually  pay  him  falls  short  of  this  ideal  maximum 
(and  the  competition  of  different  lawyers  for  my  case  may 
make  it  fall  very  far  below  that  amount),  by  just  so  much  am 
I  the  gainer  through  the  legal  talent  of  lawyers  in  general. 
I  have  therefore  no  right  to  complain,  though  I  have  to  pay 
my  lawyer  for  three  days'  work  what  would  cost  me  as  many 
months.  And  we  may  see  in  general  that  if  society  stands  in 
great  need  of,  or  will  derive  great  advantage  from,  services 
which  only  a  very  few  men  can  render,  it  is  perfectly  equitable 
that  these  men  should  command  from  society  a  return  com- 
mensurate with  the  paucity  of  their  numbers.  Any  other  sys- 
tem would  presuppose  obligations  on  their  part  towards  soci- 
ety, without  corresponding  obligations  on  the  part  of  society 
towards  them. 

The  practice  of  competition  continually  tends  to  reduce  to 
a  minimum  the  equivalent  which  men  can  charge  for  their  ser- 
vices. This  also  is  in  perfect  accord  with  equity,  since,  as  the 
number  of  persons  who  can  render  any  services  increases,  the 
relative  importance  of  each  person  diminishes.  Thus,  even 


518  APPLICATIONS  OF  ECONOMIC  SCIENCE.          [V.  46. 

from  an  idealistic  point  of  view,  nothing  can  be  said  against 
the  genera]  equity  of  the  existing  system  of  free  competition. 

There  might  indeed  be  exceptional  cases  of  great  hardship, 
as  when  one  person  takes  advantage  of  some  temporary  but 
urgent  want  of  another.  It  would  be  a  great  hardship  for  a 
bystander  to  demand  from  a  drowning  man  his  whole  fortune 
as  the  equivalent  of  pulling  him  out  of  the  water.  But  the 
customs  and  tendencies  of  society  do  not  permit  of  these  ex- 
ceptional cases  being  taken  advantage  of  in  practice.  The 
men  who  conduct  the  business  of  the  world  find  it  to  conduce 
to  their  prosperity  and  peace  of  mind  to  conduct  their  affairs 
on  broad  general  principles,  without  seeking  to  take  undue 
advantage  of  exceptional  cases. 

It  is  also  to  be  remembered  that  the  existing  system  insures 
the  employment  of  every  man  in  the  way  best  suited  to  his 
talents  better  than  any  other  system  possibly  can.  This  fact 
follows  from  almost  the  whole  system  of  political  economy,  so 
that  it  need  not  be  dwelt  upon.  The  result  is  that  the  great 
mass  of  producers  who  make  up  the  working  classes  of  the 
world  will  combine  in  the  most  advantageous  way. 

46.  Although  the  present  system  seems  the  best  one  im- 
aginable in  its  general  arrangements,  it  by  no  means  follows 
that  it  is  best  in  every  detail.  "We  have  shown  that  there 
may  be  exceptional  cases.  One  point  where  doubt  of  the  uni- 
versal equity  of  the  existing  system  may  arise  is  made  when 
we  find  artificial  means  adopted  to  prevent  that  competition 
which  insures  society  against  being  required  to  pay  for  indi- 
vidual services  more  than  they  are  worth,  and  to  create  arti- 
ficial monopolies.  Such  a  case  arises  when  a  telegraph  com- 
pany charges  so  high  for  its  messages  that  its  lines  are  idle 
a  considerable  portion  of  the  time ;  when  mechanics  combine 
to  abstain  from  work  in  order  that  they  may  command  more 
from  society  than  the  equivalent  which  would  be  fixed  by  free 
competition,  and  to  limit  the  number  of  persons  who  can 
learn  a  trade.  But  it  has  not  yet  been  shown  that  anything 


V.  47.]  OF  SOCIALISTIC  IDEAS.  519 

would  be  gained  by  attempts  to  prevent  such  combinations 
through  legal  action. 

In  this  connection  there  is  an  historical  fact  still  existing  and 

O 

not  to  be  lost  sight  of.  As  a  general  rule  those  improvements 
in  the  process  of  manufacture  which  have  resulted  in  so  large 
an  increase  in  the  production  of  cotton  and  woollen  goods  that 
the  poorest  man  in  the  land  can  now  wear  a  white  shirt  on 
Sunday,  and  warm  clothing  all  winter,  have  uniformly  met 
with  a  bitter  opposition  from  the  class  to  which  labor-reform- 
ers belong.  Even  now  nothing  is  more  common  than  com- 
binations against  cheap  methods  of  production.  These  com- 
binations are  at  war  with  the  good  of  society  in  general,  and 
especially  with  the  good  of  the  poorer  class  of  laborers.  The 
greatest  want  of  this  class,  at  least  in  our  large  cities,  is  more 
house-room.  If  the  organized  efforts  of  philanthropists  were 
directed  rationally,  this  would  be  the  point  first  aimed  at.  But 
instead  of  the  efforts  of  labor-reformers  being  aimed  in  this 
direction,  we  find  that  nearly  all  the  artisans  engaged  in  doing 
the  work  necessary  to  the  construction  of  a  house  are  formed 
into  organizations  whose  object  is  to  limit  in  every  way  the 
building  of  houses.  They  seek  to  prescribe  the  number  of 
boys  who  shall  be  allowed  to  learn  how  to  lay  bricks,  or 
plaster,  or  do  anything  else  requiring  skill. 

47.  The  inquiry  now  presents  itself,  What  system  would 
socialists  substitute  for  the  existing  one  ?  This  inquiry  it  is 
impossible  to  answer  within  the  limits  of  the  present  chapter, 
for  the  reason  that  the  systems  which  have  been  proposed  are 
too  numerous  and  too  indefinite  to  be  described  and  discussed 
in  detail.  The  most  celebrated  ones  are  founded  on  theories 
of  the  perfection  of  human  nature  which,  however  beautiful 
they  may  be  as  creations  of  the  fancy,  have  nothing  to  cor- 
respond to  them  in  the  world  we  live  in.  Time  would  be 
wasted  in  discussing  such  systems,  for  the  simple  reason  that 
it  would  be  vain  trying  to  instruct  any  man  whose  common- 
sense  would  not  suffice  to  show  him  their  impracticability. 


520  APPLICATIONS  OF  ECONOMIC  SCIENCE.          [V.  48. 

The  dan<*er  which  now  threatens  society  in  this  direction  does 
not  come  from  the  propounders  of  new  systems,  but  from 
popular  efforts  to  make  such  changes  in  the  details  of  our 
present  system  as  it  is  supposed  may  remedy  the  evils  which 
surround  us.  The  way  most  thoroughly  to  dispose  of  the 
subject  is  to  inquire  by  what  means  and  to  what  extent  it 
would  be  possible  for  the  wisest,  most  beneficent,  and  most 
powerful  government,  a  government  which  could  do  anything 
it  pleased,  to  improve  on  the  present  state  of  things.  Let  us 
then  suppose  such  a  government  to  set  out  to  remedy  all  the 
evils  that  we  so  frequently  hear  about,  and  to  start  mankind 
on  the  road  to  happiness. 

48.  The  first  object  aimed  at  by  socialists  is  that  every  man 
shall  be  enabled  to  gain  a  living  and  to  secure  his  develop- 
ment. The  question  would  then  arise,  What  shall  we  consider 
a  living?  One  of  the  first  classes  to  be  considered  would  be 
the  poor  blacks  of  the  South.  But  even  these  are  making 
some  sort  of  a  living,  and  in  fact  as  much  of  a  living  as  they 
really  want  to  make.  "When  the  beneficent  government  sent 
its  representatives  among  them,  they  would  soon  discover  that 
the  sole  wants  of  the  beneficiaries  were  a  certain  annual  supply 
of  corn,  chickens,  and  other  products  to  eat,  a  few  old  clothes 
to  cover  their  backs,  and  some  poor  shelter  from  the  weather. 
Just  as  much  work  as  is  necessary  to  secure  these  necessaries 
the  typical  black  man  is  willing  to  perform  ;  more  is  laborious, 
and  he  will  not  perform  it  unless  forced  to  do  so.  Now,  what 
shall  the  government  do  with  him  ?  Give  him  more  food, 
better  clothes,  and  a  better  house  than  he  really  needs  ?  Then 
food,  clothing,  and  houses  must  be  taken  from  somebody  else 
for  his  benefit.  Shall  he  be  forced  to  do  more  work  in  order 
to  render  an  equivalent  for  the  increased  supply  of  necessaries 
given  him  ?  This  would  be  doing  him  a  great  wrong.  If  he 
is  not  to  be  his  own  judge  of  the  work  he  shall  do,  he  is  sim- 
ply a  slave.  As  for  development:  why  should  he  be  de- 
veloped ?  He  does  not  want  to  be,  and  it  would  be  doing  him 


V.  48.]  OF  SOCIALISTIC  IDEAS.  521 

an  injury  to  try  to  fit  him  for  a  higher  sphere.  He  is  happier 
•with  his  violin  than  he  \vould  be  in  the  Astor  Library,  and  if 
we  wish  to  fit  the  race  for  higher  pursuits  we  had  better  begin 
with  more  promising  stock. 

The  beneficent  government  next  turns  its  attention  to  the 
tenement-houses  of  New  York  City,  where  several  hundred 
thousand  poor  are  confined  in  insufficient  and  unhealthy  quar- 
ters. What  shall  be  done  with  them  ?  Shall  they  be  put 
into  larger  houses  where  they  will  have  more  air  and  room  ? 
Then  somebody  must  build  the  houses.  Bricklayers,  carpen- 
ters, and  masons  must  be  induced  to  go  to  work,  and  the 
beneficent  government  must  make  provision  for  feeding  and 
clothing  them  while  they  are  building  houses  for  the  poor. 
Just  as  the  houses  are  started  the  bricklayers  organize  a  strike. 
What  is  the  government  to  do?  Decree  that  they  shall  not 
strike,  but  be  satisfied  with  such  subsistence  as  the  government 
can  give  them  ?  This  will  be  treating  them  a  great  deal  worse 
than  modern  society  has  ever  done.  The  latter  induces  them 
to  work  if  it  can,  but  never  forces  them  to  accept  conditions 
against  their  will. 

Perhaps  the  beneficent  government  meets  the  demand  by 
giving  them  more  flour,  meat,  and  clothing,  and  thus  induces 
them  to  continue  work.  But  where  are  the  food  and  clothing 
to  come  from?  Perhaps  the  government  will  ransack  the 
houses  of  the  wealthy  to  seize  the  stores  of  food  and  clothing 
reaped  by  their  wealth.  But  they  would  be  greatly  disappointed, 
and  might  find  these  stores  not  materially  greater  here  than  in 
any  other  houses.  The  next  resource  would  be  to  tax  people 
in  general,  and  the  wealthy  in  particular,  to  raise  money  to 
purchase  flour  for  the  bricklayers.  We  anticipate  no  difficulty 
on  the  part  of  the  government  in  collecting  the  tax  to  any 
amount,  because  we  suppose  its  power  unlimited ;  but  we  do 
not  assign  it  the  faculty  of  making  something  out  of  nothing. 
Therefore  if  the  wealthy  are  taxed,  the  money  which  they  can 
spend  in  other  directions  will  be  diminished  by  exactly  the 
amount  of  the  tax.  The  wealthy  man  of  leisure  must  there- 


622  APPLICATIONS  OF  ECONOMIC  SCIENCE.          [V.  4a 

fore  discharge  some  of  his  servants,  and  thus  throw  them  out 
of  employment.  The  railway  owner  mnst  stop  building  loco- 
motives and  rolling-stock  for  his  railways,  giving  to  the  gov- 
ernment for  the  bricklayers  the  money  he  would  have  expended 
in  this  direction.  The  result  is  that  the  builders  of  locomotives 
and  cars  will  find  their  wages  diminished,  or  perhaps  they  will 
be  thrown  out  of  employment.  Then,  when  the  government 
took  the  money  and  bought  flour  for  the  bricklayers,  it  would 
come  into  direct  competition  with  the  very  occupants  of  the 
tenement-house  whom  it  was  trying  to  relieve,  and  who  wanted 
all  the  flour  they  could  get.  Thus  the  supply  of  flour  would 
be  diminished,  the  price  would  rise,  and  all  the  poorly  fed, 
clothed,  and  housed  poor  would  for  the  time  being  be  worse 
off  than  before.  The  final  result  would  be  that  the  cost  of 
bnildinsr  the  tenement-house  would  come  out  of  servants,  build- 

O  ' 

ers  of  locomotives,  and  the  occupants  of  the  houses  themselves, 
no  matter  what  arrangements  the  government  might  make. 

Our  government  next  tries  a  third  step.  It  finds  that  the  rail- 
ways of  the  country  are  very  largely  owned  by  a  few  wealthy 
men  who  ought  not  to  be  allowed  the  enjoyment  of  so  much 
wealth,  and  therefore  determines  to  confiscate  their  property. 
It  therefore  seizes  all  the  railways,  and  declares  that  the  latter 
are  hereafter  to  be  run  exclusively  for  the  public  benefit  and 
are  to  belong  to  the  public.  But  how  much  better  off  would 
the  public  be  ?  Shall  everybody  who  wants  to  ride  be  carried 
free?  No,  because  then  the  railway  will  have  no  income  to 
pay  the  men  who  run  it.  Shall  it  charge  the  same  price  as  be- 
fore for  transportation  ?  Then  nobody  will  be  any  better  off. 
Shall  it  lower  the  rate  ?  By  whatever  amount  it  lowers  the  rate, 
there  will  be  so  much  less  money  to  pay  the  employes  who 
manage  it  and  keep  it  in  repair.  Making  the  best  possible  sup- 
position, and  assuming  that  the  government  could  manage  the 
road  as  well  as  the  stockholders,  all  that  could  possibly  be  gained 
would  be  the  dividends  received  by  the  stockholders.  This 
will  be  so  insignificant,  when  compared  with  the  total  transac- 
tions of  the  road,  that  it  is  not  worth  considering.  But  even 


V.  48.]  OF  SOCIALISTIC  IDEAS.  523 

if  saved,  how  would  society  be  better  off  ?  The  stockholders 
generally  spend  their  dividends  in  improving  their  own  or  some 
other  roads,  or  in  building  houses  or  improving  farms.  If  the 
government  stops  the  dividends,  then  these  improvements  must 
also  stop,  and  thus  the  capacity  of  the  country  at  large  must  be 
diminished. 

In  this  argument  we  have  introduced  the  supposition  that 
the  railway  could  be  as  well  managed  by  the  government  as  by 
the  stockholders.  As  governments  go,  this  supposition  is  al- 
most absurd.  Every  man  of  common-sense  knows  that  the 
management  would  be  a  great  deal  worse  rather  than  better. 

Finding  it  impossible  to  supply  the  occupants  of  the  tene- 
ment-houses with  better  quarters  without  injuring  other  classes 
of  laborers,  what  shall  our  government  try  next?  Shall  the 
occupants  of  the  tenement-houses  be  removed  to  the  country 
where  they  may  have  more  fresh  air  ?  The  very  fact  that  they 
live  in  the  city  shows  that  they  prefer  city  to  farm  life.  In 
removing  them  the  government  would  therefore  be  overruling 
their  own  wishes,  which,  to  say  nothing  of  the  wrong  of  it, 
would  produce  speedy  revolution. 

But  could  not  our  government  do  something  by  employing 
the  poor  of  the  great  cities,  thus  enabling  them  to  help  them- 
selves? Everywhere  we  see  hundreds  and  thousands  of  people 
out  of  employment  and  seeking  for  something  to  do.  We  have 
shown  that  there  is  one  way  by  which  these  people  may  get 
employment,  and  that  is  by  going  to  work  on  the  very  best 
terms  they  can  command.  Can  the  government  do  anything 
better  for  them  ?  The  only  measure  that  any  one  proposes  is 
that  the  government  shall  hire  them  to  do  something.  But  in 
order  to  pay  them  wages  government  must  levy  taxes.  This 
tax  would  be  taken  right  ont  of  the  monetary  circulation,  and 
would  cause  a  diminution  in  the  ability  of  the  taxpayers  to 
employ  labor  exactly  equal  to  the  increase  in  the  power  of  the 
government  to  do  so.  Thus,  at  best,  the  injury  would  equal 
the  benefit. 

But  the  question  would  arise,  In  what  labor  would  the  gov- 


.VJ4  APPLICATIONS  OF  ECONOMIC  SCIENCE,          [V.  50. 

eminent  employ  the  men  ?  In  breaking  stone,  which  nobody 
wants  broken  ?  If  so,  it  would  be  a  waste  of  labor,  and  the  sole 
effect  of  the  operation  would  be  to  enable  the  laborers  to  cat 
food  without  producing  an  equivalent,  and  thus  to  diminish 
the  amount  of  subsistence  available  for  other  laborers.  Shall 
they  break  stone  that  somebody  wants  broken  ?  Then  the  inter- 
vention of  the  government  will  not  be  required,  because  if  any- 
body wants  stone  broken  he  will  himself  hire  laborers  to  do  it. 

49.  All  projects  of  the  class  we  have  been  describing  can 
be  most  clearly  analyzed  by  looking  at  the  whole  subject  from 
a  communistic  standpoint,  as  in  Book  II.,  Chapter  IX.,  and  by 
considering  the  distribution  of  the  products  of  labor  among  the 
various  classes  of  society  from  the  point  of  view  there  taken. 
The  fact  is  that,  under  the  present  arrangements,  men  are  work- 
ing for  each  other  in  the  most  effective  way  that  it  would  be 
possible  for  them  to  work  under  the  supervision  of  the  wisest 
government.     We  have  already  a  system  of  socialism  marvel- 
lous in  its  perfection.    The  most  admirable  feature  of  it  is  that 
those  propensities  of  men  which  we  consider  most  selfish  lead 
them  to  work  for  the  good  of  their  fellow-men.     The  men  of 
wealth  who  employ  their  money  in  building  houses,  managing 
railways,  and  sailing  ships  are  great  public  benefactors,  engaged 
in  supplying  thousands  and  even  millions  of  their  fellow-men 
with  shelter  and  with  the  means  to  make  journeys  and  to  pro- 
cure sustenance  from  all  parts  of  the  world.    Those  who  would 
destroy  the  system  may  be  aptly  compared  to  passengers  in  a 
wooden  ship  who,  on  finding  the  weather  cold  and  the  supply 
of  fuel  insufficient  for  cooking,  are  bent  upon  cutting  up  the 
ship  for  fuel  in  mid-ocean  in  order  to  warm  themselves  by  the 
fire. 

50.  We  have  not  yet  considered  some  of  the  most  far-reach- 
ing and  yet  elementary  difficulties  in  the  way  of  practical  so- 
cialism.    One  difficulty  is  that  no  matter  how  much  society 
might  want  to  benefit  an  individual,  it  could  not  do  it,  from  the 


V.  50.]  OF  SOCIALISTIC  IDEAS. 

mere  fact  of  not  knowing  what  the  individual  wants.  Every 
man  has  his  own  tastes  and  whims,  which  may  change  from 
day  to  day,  and  which  society  cannot  possibly  provide  for.  It 
is  essential  to  his  happiness  that  he  should  be  allowed  to  gratify 
such  transient  wants  in  the  best  way  he  can.  It  would  be  vexa- 
tious to  have  any  one  but  himself  decide  whether  he  should  take  a 
railway  journey  when  he  felt  that  he  needed  a  change ;  whether 
he  should  have  coffee  or  milk  for  breakfast ;  whether  he  should 
wears  his  old  clothes  or  be  supplied  with  a  new  suit.  Society 
lets  him  look  out  for  himself  in  all  such  matters,  not  because  it 
is  selfish  and  does  not  care  for  his  good,  but  because  it  really 
cannot  help  him.  He  must  look  out  for  himself,  not  because 
other  people  are  indifferent  to  his  welfare,  but  because  they 
cannot  promote  it  as  well  as  he  can  himself. 

A  little  consideration  will  show  us  that  no  system  of  social- 
ism is  possible  without  such  an  abridgment  of  individual  lib- 
erty as  no  class  of  men  would  for  a  moment  tolerate.  If  society 
is  to  guarantee  an  individual  a  living,  it  is  quite  certain  that  it 
must  prescribe  some  conditions.  To  say  that  every  man  shall 
be  entitled  to  a  living,  and  yet  retain  the  right  to  seek  work 
where  he  pleases  and  to  prescribe  his  own  condition  of  labor, 
would  be  little  short  of  an  absurdity.  What  society  now  docs 
is  to  offer  him  the  best  living  it  can,  on  the  best  conditions  he 
can  command,  leaving  him  free  to  accept  or  decline  them.  Bet- 
ter than  this  it  cannot  do.  When  society  prescribed  the  con- 
ditions to  which  he  must  submit,  a  rebellion  would  begin. 


526  APPLICATIONS  OF  ECONOMIC  SCIENCE.          [V.  52. 


CHAPTER  VII. 

OF  CUABITAELE   EFFOBT. 

51.  As  men  advance  in  civilization  the  amelioration  of  the 
condition  of  their  fellows  must  become  a  subject  of  increasing 
interest  to  them.     It  is  not  the  function  of  political  economy 
to  decide  what  men  ought  or  ought  not  to  do  to  promote  this 
end.     But  it  is  a  legitimate  function  of  the  science  to  point  out 
the  effect  upon  the  welfare  of  the  race  of  any  and  every  char- 
itable effort  into  which  men  may  enter. 

We  begin  with  some  general  remarks  upon  the  impulses  of 
our  nature.  It  is  a  well-known  fact  that  those  appetites  which 
are  essential  to  the  continued  existence  of  mankind  are  liable 
to  become  destructive  of  his  well-being  when  not  controlled  by 
reason.  Hence  in  all  civilized  communities  laws  are  enacted 
having  for  their  object  the  enforcement  of  certain  restraints  upon 
the  appetites.  The  question  may  now  arise  whether  it  is  not 
possible  that  those  benevolent  impulses  of  our  nature  which 
move  us  to  relieve  distress  and  suffering  may  lead  to  real  injury 
when  not  guided  by  reason ;  whether,  in  fact,  these  impulses 
may  not  need  to  be  restrained  as  well  as  the  appetites.  That 
such  a  case  is  at  least  possible  will  be  evident  when  we  reflect  on 
the  complexity  of  the  social  organism,  on  the  numerous  remote 
effects  which  the  combined  charities  of  the  community  may 
have  in  the  course  of  generations,  and  on  how  little  those  who 
give  alms  consider  these  effects.  It  is  impossible  to  maintain 
any  general  proposition  on  this  subject  which  shall  cover  more 
than  a  limited  range.  We  must  therefore  reach  a  conclusion  by 
considering  different  cases  in  detail. 

52.  Let  us  first  take  up  the  familiar  case  of  a  beggar.     A 
gentleman  is  implored  for  relief  by  a  repulsive  piece  of  human- 


V.52.]  OF  CHARITABLE  EFFORT.  627 

ity,  enshrouded  in  rags  and  covered  with  dirt.  Moved  by  pity, 
he  gives  him  a  dime  and  passes  on.  What  is  the  economical 
nature  of  this  transaction  ?  We  reply  that  the  transaction  is  one 
of  supply  and  demand,  belonging  to  the  same  class  as  the  sup- 
ply of  and  demand  for  personal  services.  The  combined  will- 
ingness and  ability  of  a  number  of  persons  in  the  community 
to  give  dimes  to  beggars  constitutes  a  demand  for  beggary,  just 
as  much  as  if  an  advertisement,  "  Beggars  wanted,  liberal  alms 
guaranteed,"  were  conspicuously  inserted  in  the  columns  of  a 
newspaper.  If  there  is  any  difficulty  in  seeing  the  truth  of  this 
statement,  it  should  disappear  when  the  reader  reflects  that 
nothing  is  necessary  to  constitute  an  economic  demand  except 
readiness  to  make  payments  on  certain  conditions.  Among  a 
crowd  of  children  fond  of  music,  an  ability  and  a  willingness 
to  give  pennies  to  organ-grinders  constitute  a  demand  for  their 
services.  This  is  evident.  Though  not  so  evident,  it  is  equally 
true  that  an  ability  and  a  willingness  on  the  part  of  people  of 
delicate  musical  ears  to  give  organ-grinders  pennies  for  "  mov- 
ing on"  are  equally  a  demand  for  their  services,  in  spite  of  the 
fact  that  the  service  is  the  very  thing  they  are  paying  to  get 
rid  of.  The  fact  that  the  benevolent  gentleman  may  wish  that 
there  were  no  beggars,  and  may  be  very  sorry  to  see  them, 
does  not  change  the  economic  effect  of  his  readiness  to  give 
them  money.  From  an  economic  point  of  view  the  gentleman 
pays  the  beggar  for  being  poor,  miserable,  idle,  dirty,  and  worth- 
less. 

Such  being  the  case,  the  supply  of  this  service  arises  accord- 
ing to  the  same  economic  laws  that  the  supply  of  any  other 
service  arises.  As  in  every  community  where  there  is  a  de- 
mand for  bricklayers  a  certain  portion  of  the  young  will  be- 
come bricklayers,  and  will  try  to  lay  bricks  in  such  a  way  as  to 
gain  the  highest  wages,  so  in  a  community  where  there  is  a  de- 
mand for  beggars  a  certain  number  are  sure  to  become  beggars, 
and  to  study  the  professional  accomplishments  which  will  bo 
most  likely  to  draw  money  from  the  pockets  of  the  benevolent. 
Hence,  in  the  case  supposed,  mendicity  will  exist  according  to 


528  APPLICATIONS  OF  ECONOMIC  SCIENCE.          [V.  54. 

the  samo  laws  that  govern  the  existence  of  other  trades  and 
occupations. 

53.  It  is  often  said  that  imbecility  and  mendicity  are  a 
growth  of  civilization,  being  unknown  in  primitive  communi- 
ties.    Hence  men  look  upon  them  as  they  look  upon  the  dis- 
eases of  civilization,  namely,  as  something  inseparably  associated 
with  progress.     But  a  very  little  consideration  will  show  that 
there  is  no  such  necessary  connection.      Why  are  there  no 
beggars  in  comparatively  poor  and  simple  communities?     "We 
answer,  for  the  same  reason  that  there  are  no  great  actors, 
philosophers,  or  mathematicians  in  such  communities.     It  is 
because  the  community  cannot  afford  such  luxuries.    Where  it 
is  perfectly  certain  that  no  one  can  get  anything  in  alms  by  any 
method  of  begging,  mendicity  can  never  arise.     If,  as  may 
sometimes  be  the  case,  a  child  grows  up  too  imbecile  to  make 
a  living  or  do  any  work,  his  parents,  friends,  relatives,  or  ac- 
quaintances take  charge  of  him  as  best  they  can,  and  are  care- 
ful that  he  is  not  allowed  to  wander  away  and  starve.     Men- 
dicity can  gain  a  foothold  only  when  the  community  gets  so 
wealthy  and  benevolent  as  to  present  an  economic  demand  for 
beggars  and  paupers. 

54.  A  natural  reply  to  the   above  considerations  will  be 
that  they  presuppose  the  mendicant  to  voluntarily  adopt  the 
profession  of  being  miserable,  and  that,  if  it  can  be  shown  that 
this  miserable  condition  arose  without  any  overt  act  on  his 
part,  the  law  of  supply  and  demand  will  not  cover  the  case. 

Cases  in  which  this  answer  would  be  correct  are  not  incon- 
ceivable. The  extreme  difficulty  of  deciding  whether  the 
misery  of  any  special  mendicant  is  or  is  not  intentional  might 
be  urged  on  either  side  ;  but  in  a  scientific  discussion  we  are 
concerned  with  the  principles  of  the  case,  rather  than  the 
special  facts.  To  show  what  view  we  are  to  take  of  the  possi- 
ble antithesis  between  voluntary  and  involuntary  miser/,  let  us 
consider  another  case. 


V.  64.]  OF  CHARITABLE  EFFORT.  539 

Here  is  a  little  girl,  born  of  poor  and  rather  demoralized 
parents,  who  is  being  reared  without  any  definite  object  in  life. 
From  early  childhood  she  becomes  aware  that  sums  of  money 
which  seem  to  her  fabulous  in  amount  are  raised  by  rich  people 
for  the  benefit  of  the  poor.  If  she  lives  in  Europe,  she  is  ac- 
customed to  seeing  boxes  in  churches  plainly  marked  "  For  the 
poor,"  and  she  finds  out  what  it  means  before  she  can  read. 
On  getting  a  little  older  she  becomes  conscious  that  she  has  no 
chance  to  get  any  share  of  this  money  except  by  being  even 
poorer  than  her  parents.  If  she  learns  to  cook  for  wealthier 
people,  to  do  housework,  to  sew,  to  nurse ;  and  if  she  uses  the 
knowledge  thus  acquired  in  such  a  way  as  not  to  be  a  burden 
upon  others,  then  she  will  have  no  right  to  any  of  this  money. 
To  get  her  share  of  it,  she  must  remain  poor,  miserable,  and 
worthless.  To  see  what  effect  this  may  have  upon  her  educa- 
tion and  aspirations,  let  us  look  at  human  nature  from  another 
point  of  view. 

"We  may  say  that,  in  a  certain  sense,  men  are  by  nature  poor, 
miserable,  and  worthless.  That  is  to  say,  if  a  child  grows  into 
a  man  without  ever  being  taught  or  required  to  exercise  his 
faculties,  he  will  grow  into  this  kind  of  a  being.  To  make  a 
decent  living,  even  of  the  lowest  sort,  he  must  take  pains,  prac- 
tise self-denial,  seek  for  acquaintances,  and  make  for  himself  a 
good  character  among  his  fellow-men.  It  is  therefore  not  nec- 
essary, in  order  that  the  demand  for  objects  of  charity  should 
be  supplied,  that  any  person  should  deliberately  make  up  his 
mind  to  be  a  beggar.  To  become  such  all  he  needs  to  do  is  to 
do  nothing.  He  can  then  with  a  greater  or  less  approximation 
to  truth  say,  "  I  have  never  tried  to  become  a  burden  on  soci- 
ety, and  yet  I  can  get  no  work ;  I  have  nothing  to  do ;  I  am 
nearly  starved ;  I  shall  soon  be  naked ;  I  have  no  house  in 
which  to  lay  my  head ;  I  cannot  get  money  for  the  barest  ne- 
cessities of  existence." 

The  lesson  is  this :  Although  what  the  man  says  may  be  true, 
yet,  if  there  had  been  no  charity,  he  and  his  parents  would 
34 


530  APPLICATIONS  OF  ECONOMIC  SCIENCE.          [V.  55. 

have  taken  a  different  view  of  life,  and  he  would  have  had  a 
different  training  and  a  different  history. 

55.  The  question  may  now  be  asked,  Does  it  follow  from 
all  this  that  no  effort  to  benefit  our  fellow-man  by  giving  him 
of  our  own  subsistence  can  be  otherwise  than  vain  or  injuri- 
ous ?  Are  we  to  see  thousands  of  our  fellow-beings  suffering 
the  evils  of  poverty  without  making  an  effort  to  relieve  them  ? 
Are  we  to  see  them  in  wretchedness  and  misery  without  an 
effort  to  alleviate  their  condition  ?  Is  a  certain  fraction  of  our 
race  doomed  to  continue  the  lowest  form  of  existence,  do  what 
we  may  ? 

We  reply  that  the  questions  are  not  necessarily  to  be  answered 
in  the  affirmative  on  account  of  anything  we  have  said.  What 
common-sense  unites  with  science  in  saying  is  this  :  In  order  to 
alleviate  the  race  we  must  intelligently  adapt  our  means  to  our 
ends,  and  by  merely  following  the  blind  impulses  of  our  senti- 
ments we  do  not  secure  such  adaptation.  The  real  difficulty  is 
that  charitable  effort,  as  we  see  it  every  day  practised,  is  not 
directed  intelligently  to  the  best  ends.  The  ends  to  which  it  is 
intelligently  directed  are  comparatively  unimportant  ones.  To 
show  this,  let  us  see  what  should  be  the  benevolent  purposes  of 
a  reasonable  and  philanthropic  being  and  compare  them  with 
the  ordinary  purposes  of  charitable  associations. 

Let  us  suppose  that  there  are  in  this  country  one  million  peo- 
ple in  a  state  of  such  destitution  that  they  should  receive  the 
help  of  the  charitable.  Supposing  the  state  of  society  to  re- 
main the  same  generation  after  generation,  there  will  continue 
to  be  a  constant  portion,  say  two  per  cent  of  the  population,  in 
this  deplorable  condition.  This  brings  to  our  minds  three 
classes  of  people  who  may  need  our  help.  We  have,  firstly, 
the  few  score  or  hundreds  whom  we,  or  the  organizations  with 
whom  we  are  connected,  can  find  in  our  own  city.  Secondly, 
we  have  the  remaining  portion  of  the  million  whom  we  do  not 
see,  and  whom  we  must  leave  others  to  find.  Thirdly,  we  have 


V.  65.]  OF  CHARITABLE  EFFORT.  631 

the  possible  future  millions  who  are  to  live  in  this  country  in 
future  generations. 

Corresponding  to  these  three  classes  we  have  as  many  differ- 
ent purposes  which  charitable  effort  may  have  in  view.  The 
ordinary  charitable  society  is  devoted  principally  to  the  first 
class,  namely,  those  poor  whom  we  can  find  within  their  own 
sphere  of  operations.  As  a  general  rule  their  efforts  do  not 
make  any  change  in  the  character  of  the  unfortunate  people 
with  whom  they  deal,  being  mainly  directed  to  the  relief  of 
their  immediate  wants.  Of  course  the  society  would  like  very 
much  to  elevate  them  in  their  characters  and  constitutions,  and 
many  such  associations  have  this  in  view.  But  the  chances  are 
that  such  efforts  do  not  generally  lead  to  any  well-marked  bene- 
ficial result. 

Another  purpose  we  might  have  in  view  is  the  relief  and 
the  elevation  not  only  of  the  few  poor  we  can  find,  but  of  the 
whole  million  whom  we  suppose  to  live  in  the  country.  Finally, 
a  yet  wider  and  higher  motive  is  that  of  seeing  that  the  pros- 
pective poor  and  miserable  of  future  generations  are  diminished 
in  numbers  as  much  as  possible. 

We  thus  see  that  charity  may  have  very  different  objects  in 
view;  and  it  is  perhaps  not  quite  just  to  say  that  charitable 
associations  do  not  intelligently  adapt  means  to  ends,  for,  as 
a  matter  of  fact,  it  must  be  considered  that  if  their  end  is 
merely  to  relieve  those  particular  persons  to  whose  ameliora- 
tion their  efforts  are  directed,  then  that  end  is  certainly  at- 
tained by  them.  There  can  be  no  doubt  that  if  we  give  a 
supply  of  food  and  clothing  to  a  half-starved  family,  the  wants 
of  that  family  will  be  relieved  so  long  as  the  supply  holds  out. 
The  real  question  is  whether  this  kind  of  relief  should  be  the 
main  object  of  our  supposed  reasonable  and  philanthropic  being 
who  desires  to  do  the  greatest  good  by  his  efforts. 

A  very  little  consideration  will  show  us  that  it  should  not. 
To  a  reasonable  being  the  interests  of  the  mass  of  poor  whom 
he  cannot  reach  should  be  as  dear  as  the  interests  of  the  few 
whom  he  can  reach.  The  object  of  not  adding  to  the  number 


532  APPLICATIONS  OF  ECONOMIC  SCIENCE.          [V.  55. 

of  the  poor  and  miserable  should  be  kept  in  view,  as  well  as 
that  of  aiding  the  poor  and  miserable  who  now  exist.  The 
diminution  of  the  number  of  such  beings  in  future  generations 
should  be  kept  in  sight  as  well  as  the  diminution  of  those  at 
the  present  time. 

The  first  answer  to  this  will  be  that  even  if  we  grant  it,  yet 
the  great  mass  are  people  whom  we  can  neither  see  nor  help. 
Still  less  can  we  do  anything  for  future  generations ;  therefore 
we  will  do  onr  best  work  by  attending  to  those  who  are  within 
our  reach.  "We  must  let  the  future  bear  its  own  burdens. 

Here  the  philanthropic  philosopher  must  join  issue  with  the 
charitable  man.  The  way  we  deal  with  the  poor  and  miserable 
we  see  around  us  has  a  most  important  effect  upon  the  poor 
and  miserable  we  do  not  see.  The  next  generation  will  be 
brought  into  the  world  by  this  generation,  and  it  depends  en- 
tirely upon  the  acts  of  this  generation  how  many  poor  and 
miserable  there  shall  be  in  the  next.  The  law  that  like  brings 
forth  like  is  as  true  with  the  human  race  as  with  animals  and 
plants.  The  greater  the  number  of  the  degraded  classes  who 
are  allowed  to  produce  offspring  which  are  allowed  to  grow  to 
maturity,  the  more  rapidly  will  these  classes  increase.  What 
effect  we  wish  our  acts  to  have  does  not  come  into  the  ques- 
tion in  considering  the  consequences  of  those  acts.  What  we 
are  concerned  with  is  the  natural  consequences  of  our  acts  and 
not  the  motives  which  prompt  them.  We  cannot  evade  the 
conclusion  that  the  inevitable  result  of  our  current  forms  of 
charity  is  to  enable  the  poor,  miserable,  and  worthless  elements 
of  the  community  to  bring  forth  children,  to  enable  those 
children  to  escape  the  perils  of  infancy  and  grow  to  manhood, 
and  to  deprive  them  of  the  strongest  incentive  to  become  use- 
ful members  of  society,  namely,  the  prospect  that  they  will 
starve  to  death  unless  they  learn  to  make  a  living.  This  re- 
sult is  what  the  reasonable  philanthropist  must  deplore. 

The  defect  m  the  current  reasoning  of  the  charitable  is  sim- 
ply this :  They  consider  that  the  effects  of  their  charity  termi- 
nate with  the  relief  of  their  beneficiaries.  Hence  when  they 


V.  55.]  OF  CHARITABLE  EFFORT.  533 

find  that  an  applicant  is  really  worthy,  they  consider  their  case 
fully  made  out.  What  they  do  not  consider  is  the  moral  effect 
of  their  work  upon  the  demoralized  classes  at  large,  and  espec- 
ially upon  the  training  of  their  growing  children. 

The  question  now  arises  whether  there  is  any  way  of  modi- 
fying these  effects.  Must  all  charitable  effort  be  directed  sole- 
ly towards  enabling  the  degraded  classes  to  live  and  propagate 
without  elevating  them  ?  Can  they  not  be  elevated  by  such 
action?  The  answer  to  these  questions  should  come  from  the 
socialist  rather  than  the  economist,  and  so  does  not  properly 
belong  to  the  present  work.  It  may,  however,  be  remarked 
that  all  classes  of  humanity  do,  to  a  certain  extent,  admit  of 
elevation,  and  that  they  can,  generation  by  generation,  be  slow- 
ly elevated  if  we  properly  adapt  the  means  to  the  ends.  The 
great  end  we  should  have  in  view  is  that  of  enabling  the  indi- 
vidual to  earn  a  living  by  his  own  exertions.  So  far  as  our 
charitable  effort  is  directed  towards  that  end  and  no  other,  so 
far  may  its  effect  be  beneficial.  Society  is  greatly  in  want  of 
laborers  of  every  order  who  can  be  relied  upon.  If  the  chil- 
dren of  the  degraded  classes  could  be  taken  in  infancy,  before 
their  bad  habits  have  had  time  to  form,  and  trained  to  earn  a 
livelihood,  a  certain  proportion  of  them  would  be  redeemed. 
If  those  who  could  not  be  so  trained  were  allowed  to  starve, 
the  number  to  grow  up  a  burden  on  society  would  be  dimin- 
ished. The  greatest  difficulty  in  the  way  of  such  a  policy  is  to 
organize  charitable  effort  in  such  a  way  that  it  shall  be  intelli- 
gently directed  to  this  end.  The  natural  tendency  of  such 
effort  is  the  very  opposite  of  that  here  pointed  out.  What  we 
really  ought  to  do  is  to  train,  persuade,  or  compel  every  person 
to  earn  his  living  under  penalty  of  starvation.  The  funda- 
mental idea  of  current  charity  is  the  wholly  incompatible  one 
of  enabling  the  favored  few  who  chance  to  excite  our  sym- 
pathies to  get  a  living  without  earning  it.  Just  so  far  as  we 
can  free  ourselves  from  this  benevolent  impulse  and  turn  our 
efforts  in  a  more  rational  direction,  so  far  may  wo  hope  that 
charitable  effort  may  yet  be  beneficial  to  the  race. 


634  APPLICATIONS  OF  ECONOMIC  SCIENCE.          [V.  57. 

56.  Wo  have  seen  in  preceding  chapters  of  this  work  that 
every  man  who  saves  up  and  invests  his  money  does  really  em- 
ploy it  in  such  a  way  as  to  benefit  all  laborers  able  to  earn  a 
living.     He  does  this  by  increasing  the  supply  and  lowering 
the  price  of  the  necessaries  of  life.    Of  course  he  does  not  help 
those  who  are  unable  to  labor,  because  one  who  has  no  income 
of  his  own  can  purchase  nothing,  no  matter  how  cheap  it  may 
be.     We  have  also  seen  that  the  profits  on  an  investment  will 
be  greater  the  greater  the  advantage  which  it  insures  to  the 
community.     If  a  capitalist's  investment  is  a  losing  one,  it 
shows  that  the  labor  he  has  directed  by  it  has  not  been  em- 
ployed in  the  most  economical  manner  to  supply  the  wants  of 
society  at  large.     Without  denying  the  possibility  that  intelli- 
gent philanthropic  effort  may  in  the  future  do  much  for  ele- 
vating the  most  degraded  of  the  race,  we  may  at  least  lay  down 
this  proposition :  It  has  not  yet  been  clearly  shown  that  the 
possessor  of  a  fund  can  benefit  the  race  by  it  in  any  more 
effective  way  than  by  investing  it  in  the  best  paying  form  of 
capital.     Better  methods  will  no  doubt  be  found  in  the  future, 
for  the  reason  that  this  application  of  capital  takes  no  account 
of  the  training  of  children,  and  it  is  to  this  training  that  phil- 
anthropic efforts  should  be  directed. 

57.  Concluding  Considerations.     The   study  of  political 
economy  has  two  objects.     One  is  the  pleasure  which  every 
well-constituted  man  feels  in  understanding  the  processes  which 
are  going  on  in  the  world.     This  pleasure  is  quite  independent 
of  any  relation  of  these  processes  to  the  wants  of  life.     The 
other  object  is  to  see  how  the  interests  of  mankind  may  be 
promoted  by  public  action. 

It  is  instructive  to  seek  out  a  classification  of  the  interests 
which  actuate  men  in  promoting  the  good  of  themselves  or 
others.  Our  present  stand-point  leads  us  to  consider  three 
motives  to  human  action  : 

The  love  of  self  ; 


V.  57.]  OF  CHARITABLE  EFFORT.  535 

The  love  of  a  limited  class  having  common  interests  and 
feelings  with  one's  self ; 

The  love  of  mankind  at  large. 

Let  us  consider  these  motives  in  order. 

The  love  of  self,  or  egoism,  as  it  has  recently  been  called  in 
philosophy,  or  selfishness,  as  its  abnormal  development  is  famil- 
iarly termed,  is  not  so  great  an  evil  as  is  commonly  supposed. 
It  would  indeed  be  a  most  destructive  agent  if  it  were  absolute; 
that  is,  if  men  in  general  were  so  selfish  as  to  care  absolutely 
nothing  for  the  happiness  of  their  fellows.  But,  as  a  matter  of 
fact,  moral  training  and  the  habit  of  obedience  to  law  have  so 
modified  the  inherent  selfishness  of  the  individual  as  to  render 
it  comparatively  harmless.  One  reason  for  this  harmlessness  is 
that,  as  a  general  rule,  every  man  can  promote  his  own  inter- 
ests a  great  deal  more  effectively  than  he  can  promote  any  one 
else's,  or  than  any  one  else  can  promote  his.  Another  is  that 
the  selfish  man  can  get  little  help  from  his  fellow-men.  But 
the  most  cogent  reason  of  all  is  that  men  cannot  promote  their 
own  economic  interests  except  through  promoting  those  of 
their  fellow-men. 

The  second  form  of  love,  that  for  the  class  to  which  we 
belong,  is,  at  present,  the  most  dangerous  one  to  which  society 
is  exposed.  How  this  is  we  shall  show  by  comparing  it  with 
the  third  form. 

Love  for  humanity  at  large  has  before  it  a  wide  field  for  its 
beneficial  exercise,  if  it  can  only  be  spurred  to  action  and 
directed  into  appropriate  channels.  %But  there  are  great  diffi- 
culties in  the  way  of  its  most  effective  operation.  It  is  almost 
a  hopeless  task  for  any  individual,  acting  by  himself,  to  do  very 
much  for  the  benefit  of  society  at  large,  unless  he  is  possessed 
of  power  or  wealth.  Legislation  has  done  little,  because  legis- 
latures in  general  have  never  had  the  problem  presented  to 
them,  or  made  it  a  subject  of  special  study.  Their  views 
generally  represent  those  of  the  community  from  which  they 
come,  and  the  interests  which  they  seek  to  promote  are  apt  to 
be  temporary  in  their  character,  and  only  such  as  strike  the 


536  APPLICATIONS  OF  ECONOMIC  SCIENCE.          [V.  57. 

public  at  first  sight.  "We  may  make  tins  clearer  by  some  illus- 
trations as  showing  the  general  field  of  possible  action  which 
lies  before  us. 

In  thirty  or  forty  years  nearly  all  the  people  now  on  the 
active  stage  of  life  in  this  country  will  have  passed  from  that 
stage,  and  a  new  generation  will  have  taken  their  places.  To 
one  loving  mankind  at  largo  the  happiness  of  that  coming 
generation  should  be  the  first  object.  Now,  although  at  first 
sight  it  might  seem  almost  hopeless  to  attempt  doing  anything 
for  this  coming  generation,  yet  by  looking  more  closely  we  find 
that  its  happiness  depends  almost  entirely  upon  our  own  actions. 
To  promote  its  happiness  we  should  bequeath  to  it  physical 
and  moral  health,  a  thorough  training  in  correct  principles  of 
action,  and  such  laws  and  institutions  as  shall  best  allow  it  to 
promote  its  welfare.  We  should  avoid  allowing  it  to  be  en- 
cumbered by  criminals.  Love  of  mankind  at  large  should 
prompt  us  to  take  such  measures  as  shall  discourage  or  prevent 
the  bringing  forth  of  children  by  the  pauper  and  criminal 
classes.  No  measure  of  repression  would  be  too  severe  in  the 
attainment  of  the  latter  object.  The  consideration  due  to  a 
degraded  man  of  any  class  is  as  nothing  compared  "with 
that  due  to  the  society  of  the  future.  Many  a  good  man  has 
gone  to  his  grave  through  the  failure  of  society  to  hang  one 
criminal.  No  higher  or  purer  source  of  human  happiness 
exists  than  the  tender  sentiments  of  man  towards  man.  But 
these  very  sentiments  are  a  source  of  enduring  injury  in  the 
repugnance  which  they  generate  to  a  really  effective  system  of 
dealing  with  the  dangerous  class  in  our  population. 

After  promoting  the  birth  of  good  stock,  the  next  step  would 
be  its  proper  education.  Here  only  careful  experiment  can 
show  what  society  is  able  to  do.  The  casual  remarks  which  the 
budding  child  hears  dropped  from  its  parents  at  table,  and 
.from  which  he. forms  an  idea  of  the  spirit  which  animates  men, 
is  a  more  powerful  instrument  of  education,  moral  or  immoral, 
than  any  other.  This  would  suggest  the  foundation  of  institu- 
tions for  the  correction  of  children  of  tender  age  who  are  in 


V.  57.]  OF  CHARITABLE  EFFORT.  537 

danger  of  becoming  criminals.  But  it  is  an  open  question 
whether  such  institutions  are  or  can  be  made  to  succeed.  The 
danger  which  besets  most  charitable  institutions  devoted  to  the 
rearing  of  children  is  that  of  being  conducted  from  a  senti- 
mental rather  than  a  scientific  point  of  view. 

Let  us  now  return  to  the  second  form  of  selfishness  which  we 
have  described,  and  which,  as  just  remarked,  is  in  the  present 
state  of  society,  and  especially  in  the  United  States,  a  most 
dangerous  one.  It  is  dangerous  on  account  of  being  vastly 
more  powerful  and  less  repulsive  than  individual  selfishness, 
while  much  more  injurious  to  society  at  large.  When  we 
analyze  the  calls  for  legislation  made  upon  Congress  and  the 
State  legislatures,  the  economic  and  social  theories  in  the  news- 
papers, and  the  various  factions  and  parties  which  contend  for 
influence  in  political  affairs,  we  find  that  nearly  all  have  the 
interests  of  companies,  corporations,  or  other  special  classes  of 
men  in  view,  and  that  it  is  sought  to  promote  these  interests  at 
the  expense  of  those  of  the  public. 

The  most  common  example  of  this  motive  is  seen  in  the 
trades-unions  and  labor  organizations  which  exist  in  nearly 
every  civilized  country.  The  individual  bricklayer  would  be 
powerless  in  a  war  with  society,  but  his  feeling  of  sympathy 
with  all  his  fellow-bricklayers  who  are  within  reach  leads  to 
a  union  with  them,  which  comprises  a  general  understanding 
that  each  individual  shall  subordinate  himself  to  the  union  at 
large  for  the  general  benefit  of  the  class  of  bricklayers.  This 
feeling  extends  in  a  diminished  degree  to  similar  unions  of 
other  trades  in  the  same  community,  as  well  as  to  the  unions 
of  other  communities.  Thus  we  have  a  sort  of  network  of 
sympathy,  strongest  in  binding  the  individual  to  those  of  the 
same  trade  who  immediately  surround  him,  but  yet  including 
within  its  range  all  the  unions  of  the  land.  At  first  sight 
there  is  something  which  looks  praiseworthy  in  this  devotion 
of  man  to  man,  especially  when  we  see,  as  sometimes  hap- 
pens, a  number  of  individuals  voluntarily  suffering  extreme 
privation,  and  perhaps  giving  up  opportunities  for  profitable 


538  APPLICATIONS  OF  ECONOMIC  SCIENCE.          [V.  57. 

employment,  in  obedience  to  a  supposed  interest  of  their  class. 
Now,  what  is  wanted  is  that  this  spirit  of  sympathy  should  in- 
clude not  merely  the  limited  class  which  it  does,  but  the  whofo 
community.  Failing  in  this,  the  philanthropist  would  like  to 
see  it  confined  to  such  a  field  as  would  benefit  the  community. 

tt 

As  things  now  stand,  the  organizations  are  as  purely  selfish  as 
the  most  selfish  individual,  and  are  at  the  same  time  vastly 
more  powerful,  and  therefore  more  difficult  to  control. 

We  have  presented  these  considerations  in  order  to  show 
the  student  of  political  economy  what  a  field  there  is  for  the 
application  of  what  he  has  learned,  if  he  desires  to  take  an 
active  part  in  the  improvement  of  society. 


ADDENDUM. 


A  SUMMARY  OF  THE  LEADING  PRINCIPLES  OF  ECONOMICS 
AS  SET  FORTH  IN  THE  PRESENT  WORK.* 

The  economist  should  understand : 

That  there  is  a  general  science  of  economics,  founded  on 
those  characteristics  of  human  nature  and  on  those  relations 
of  man  to  his  environment  which  are  common  to  all  civilized 
people ; 

That  the  principles  of  this  general  science  have  to  be 
specialized  and  modified  to  suit  the  circumstances  of  each  peo- 
ple to  whom  they  are  applied ; 

That  the  main  object  of  economic  science  is  to  enable  us  to 
foresee  the  effects  of  economic  causes  (I.  24)  ; 

That  all  our  conclusions  rest  upon  the  hypothesis  that  men 
intelligently  adapt  means  to  ends,  and  seek  their  own  interests 
according  to  the  best  of  their  knowledge  (I.  3,  17,  18) ; 

That  there  are  no  universal  theories  in  economics  to  bo 
applied  without  regard  to  time  and  circumstances,  and  that  no 
formula  can  be  given  which  will  save  the  statesman  the  labor 
of  working  out  each  case  on  its  own  merits ; 

But  that  economics  furnishes  the  statesman  with  principles 
most  necessary  for  working  out  results  ; 

That  capital  is  the  result  of  abstinence  from  present  gratifi- 
cation for  the  sake  of  future  good,  and,  in  order  to  bo 

*  This  summary  of  economic  principles  is  given  In  order  to  facilitate 
their  critical  examination  by  the  reader.  They  will  also  assist  the  student 
in  deciding  whether  his  grasp  of  the  subject  is  satisfactory. 


540  SUMMARY  OF  LEADING  P1UNC1PLES. 

effective,  must  be  so  applied  as  to  increase  the  ultimate  product 
of  a  fixed  amount  of  labor  (II.  29,  30) ; 

That  stocks,  bonds,  and  every  other  form  of  interest-yield- 
ing investments  are  rights  of  ownership  in  material  exchange- 
able capital  (II.  31) ; 

That  the  work  of  the  organizer  of  labor  is  as  necessary  to 
production  as  that  of  the  laborer  himself  (II.  40) ; 

That  labor  can  slowly  change  its  occupation  without  detri- 
ment, and  can  thus  adapt  itself,  within  certain  limits,  to  vary- 
ing demands  (II.  49,  50;  IV.  38); 

That  all  men  performing  economic  functions  of  any  kind 
are  engaged  in  labor  designed  to  promote  the  good  of  their 
fellow-men  (I.  1,  II.  53) ; 

That  the  greater  and  the  better  the  production  of  the 
necessaries  of  life,  the  more  perfectly  will  the  wants  of  the 
community  at  large  be  supplied  (II.  54,  56); 

That  bank  credits  constitute  an  integral  part  of  the  volume 
of  the  currency,  and  should  be  included  with  specie  and  bank- 
notes in  estimating  that  volume  (II.  96-99) ; 

That  there  is  no  such  thing  as  an  absolutely  invariable 
measure  of  value,  and  that  the  best  approximation  to  an  abso- 
lute standard  is  found  by  making  labor  itself  the  standard  as 
nearly  as  possible  (III.  5-11) ; 

That  the  quantity  of  goods  which  can  be  sold  in  any  market 
under  fixed  conditions  depends  upon  the  price  at  which  they 
are  offered,  diminishing  with  every  increase  of  price,  and  vice 
versa  (III.  14) ; 

That  the  foregoing  proposition  is  true  only  for  each  state  of 
the  market  separately,  and  that  the  quantity  of  goods  which 
can  be  sold  at  a  fixed  price  will  vary  from  time  to  time  with 
the  public  needs  (III.  16) ; 

That  all  the  requisites  of  production  are  not  equally  at  the 
command  of  everybody  (III.  21-28) ; 

That  rent  of  land  arises  only  because  the  products  of  the 
soil  command  a  higher  price  than  they  would  if  they  could 
be  produced  in  unlimited  quantities  (III.  33) ; 


SUMMARY  OF  LEADING  PRINCIPLES,  641 

That  the  net  cost  of  production  of  many  commodities  de- 
pends greatly  upon  the  natural  facilities  which  the  producer 
can  command,  and  continually  diminishes  with  improvements 
(III.  45-47)  ; 

That  the  values  of  the  total  imports  and  exports  to  and  from 
any  one  country  necessarily  balance  each  other  in  the  long-run 
(III.  55-61) ; 

In  consequence,  that  any  action  which  diminishes  imports 
must  ultimately  diminish  exports  in  nearly  the  same  degree 
(111.70,71); 

That  the  rate  of  interest  is  regulated  by  the  supply  and 
demand  of  loanable  funds  (III.  72-75) ; 

That  every  legal  person,  in  the  long-run  and  as  a  general 
rule,  pays  out  as  much  money  as  he  receives.  Hence  any 
increase  in  his  receipts  will  be  followed  by  a  corresponding 
increase  in  his  payments  (IV.  4) ; 

That  the  economic  effect  of  an  increased  flow  of  money 
from  any  person  cannot  be  completely  determined  until  we 
find  what  laborers  the  increase  reaches  (Bk.  IV.,  Chap.  VI.) ; 

That  there  is  no  definite  volume  of  currency  necessary  to 
the  transaction  of  the  business  of  a  community,  but  only  a 
definite  relation  between  the  volume  of  currency  and  the  scale 
of  prices  (V.  30)  ; 

In  consequence,  that  a  scarcity  in  the  monetary  flow  can  be 
remedied  by  a  fall  in  prices  as  well  as  by  an  increase  in  that 
flow ;  but  that  this  particular  remedy  is  incomplete  and  un- 
satisfactory, because  all  prices  cannot  thus  adapt  themselves 
(IV.  40); 

That  an  increase  in  the  volume  or  flow  of  the  currency  does 
not  permanently  help  business,  because  it  leads  to  a  rise  of 
prices,  and  therefore  to  a  greater  necessity  for  money; 

In  consequence,  that  we  cannot  increase  the  absolute  value 
of  the  total  volume  of  currency  by  additions  to  that  volume 
(IV.  19) ; 

That  no  increase  of  wages  benefits  the  laborer  if  lie  has  to 
pay  an  increased  price  for  the  necessaries  of  life,  as  he  always 


042  SUMMAIIT  OF  LEADING  PRINCIPLES. 

will  unless  his  wages  are  increased  by  increasing  the  effective- 
ness of  his  labor ; 

That  as  a  general  rule  a  person  can  gain  income  only  by 
assisting  his  fellow-men  to  an  amount  equal  to  his  income 
(IV.  29) ; 

That  whenever  the  price  of  a  commodity  rises,  some  or  all 
persons  engaged  in  supplying  that  commodity  are  gaining  a 
corresponding  increase  of  income  (IV.  30) ; 

That  no  person  can  increase  the  demand  for  labor  by  ex- 
pending his  money  in  one  way  rather  than  in  another,  but 
that,  in  whatever  way  he  spends  it,  he  is  directly  or  indirectly 
creating  a  demand  equal  to  his  expenditure  (Bk.  IV.,  Chap. 

vi.); 

That  the  demand  thus  created  is  for  the  particular  labor 
necessary  to  produce  the  commodities  which  he  has  demanded, 
and  that,  in  consequence,  he  directs  labor  by  directing  his 
expenditure ; 

That  any  change  in  the  direction  of  labor  produced  by 
change  of  expenditure  can  be  made  by  a  corresponding  change 
in  the  occupations  of  men  (II.  49) ; 

That  by  no  device  of  government  or  society  can  everybody 
be  satisfactorily  employed  all  the  time  ; 

That  demand  for  labor  involves  a  relation  between  two 
terms — the  laborer's  estimate  of  the  value  of  his  services,  and 
the  wages  which  others  can  afford  to  pay  him  (IV.  39) ; 

That  the  proportion  of  the  unemployed  will  in  the  long-run 
be  nearly  the  same,  whatever  financial  policy  we  adopt,  and 
however  men  spend  their  money ; 

That  any  cause  which  prevents  the  rate  of  wages  from 
adapting  itself  to  the  varying  demand  for  labor  is  injurious 
both  to  the  laborer  and  to  society ; 

That  no  labor-saving  processes  can  diminish  the  sum  total 
of  the  demand  for  labor,  because  whatever  money  is  thus 
saved  to  any  person  goes  to  demand  labor  in  some  other  direc- 
tion (IV.  41) ; 

That  the  capitalist  can  gain  interest  on  his  investments  only 


SUMMARY  OF  LEADING  PRINCIPLES.  543 

by  helping  his  fellow-men  who  have  not  accumulated  capital 
(Bk.  IV.,  Chap.  IX.); 

Consequently  that  the  more  miserly  he  is  in  his  habits,  and 
the  more  careful  he  is  in  his  investments,  and  the  greater  the 
excess  of  his  capital  above  that  required  by  his  personal 
needs,  the  greater  the  good  he  does  to  his  fellow-men  ; 

That  a  man  takes  from  the  common  stock  of  goods  only 
what  he  actually  expends  in  his  own  consumption  (Bk.  II., 
Chap.  IX.); 

That  the  sole  object  of  wealth  is  the  sustenance  and  enjoy- 
ment of  individual  men ; 

That  the  benefit  of  every  industrial  establishment  is 
measured  by  the  product  it  turns  out,  and  not  by  the  em- 
ployment which  it  gives  to  labor  or  capital ;  that,  on  the  con- 
trary, the  labor  and  capital  which  it  absorbs  are  to  be  placed 
on  the  debit  side  of  its  account  with  society  (Bk.  IV.,  Chap. 
XIII.,  and  Y.  13) ; 

That  the  motives  which  animate  men  in  the  pursuit  of 
wealth  are  in  the  highest  degree  beneficent,  and  have  led  to 
a  system  which  insures  to  every  man  fit  to  live  the  maximum 
of  enjoyment  from  his  labor,  if  he  will  only  adapt  himself  to 
the  system  (Bk.  V.,  Chap.  VI.). 


INDEX. 


Abstinence  the  source  of  capital 

89,  397 
Agriculture,  relative  diminution 

of 141 

Appropriation  of  natural  wealth  78 
Atkinson,  production  of  U.  S. .  469 
Averages,  law  of 28 

Bank  of  England 177,  510 

Bank-notes 165 

Relation  to  lainsez-faire 454 

Banks 157 

Deposits  and  cheques 159 

Circulation 161 

Discount  functions 162 

Statements  of  balance 162,  164 

Runs  on 168 

Unsound,  in  U.  8 171 

National,  of  U.  8 173 

Barter 58 

Bastiat,  the  labor  fallacy 428 

His  parody  of  protection ....  472 

Beggars,  supply  of 527 

Bimetallism 152,  154,  494 

Argument  for 495 

Bounty,  French,  on  sugar 474 

Cairnes,  non-competing  groups.  117 
Capital,  definition  and  nature. 55,  82 

Classification 84 

Functions  of 88,  396,  405 

Property  in 91 

Transformation  of 121 

Reproduction  of 87 

Capitalist,  his  functions 397 

Carey,  H.  C.,  cited 41 

Cause  and  effect 18,  81 

Cernuschi  on  bimetallism 495 

Charity,  effects  of 526 

Cheques  on  banks 159 

35 


Cheques,  relation  to  currency. .  191 
Circulation,  the  monetary.  .316,  872 

The  industrial 826 

Circulation,  equation  of 328 

Laws  of 838 

Cities,  growth  of 141 

Clearing-house 179 

Coinage  of  money 149 

In  U.  8 153,  418 

Present  uncertainty  of 155 

Subsidiary 155 

Combinations  to  keep  up  price 

270,  518,  537 

Commerce,  foreign 278 

Commodities,  definition 55 

Demand  for 874,  404,  434 

Communistic  view  of  wealth.. 5.  127 
Competition  of  foreign  labor..  104,467 

Determining  price 248,  517 

Among  business  men 252 

Among  producers 266 

Congress  as  a  regulator  of  in- 
dustry  456,  458 

Management  of 458 

Consumption,  definition 59 

Productive  and  unproductive    59 

Copyright 283 

Cost  of  production 257 

Graduated 264 

Credit,  definition  of 52,  157 

Use  as  money 163,  189 

Currency,  volume  of. .  .155,  187,  820 

Fluctuations  in  volume 842 

Flow  of 816 

Regulation  of 501 

Customs  duties 296,  459,  477 

Debts,  relation  to  standard  of 

value 214 

Effects  of  payment 885 


546 


INDEX. 


Deduction,  example  of 17 

Deductive  method,  nature  of. . .     25 
Demand, relation  to  price  217,220,350 

Equal  to  supply 222 

Measure  of 348,  355 

Directs  industry 369 

For  goods  and  labor. 374,  404,  434 

Deposits  in  bank 159,  161 

Diminishing  returns 242 

Division  of  labor 98 

Dollar,  what  it  is 153 

Absolute  value  of 213,  425 

The  flat 507 

Duties  ou  imports 296 

Economics,  definition  and  field    13 
Distinct  from  sociology  and 

morals 10 

Logical  method 14,  22 

Efficiency  of  the  laborer 103 

Equilibrium  of  supply  and  de- 
mand  266,  271 

Exchange,  definition 57 

Friction  of 62,  106 

Mechanism  of 145 

Foreign 183,  281 

Graphic  representation  of. . . .  315 

Fallacies  in  logical  method 32 

In  conclusions 419,  472 

Fiat-money 507 

Flow  of  currency 316,  318 

Fluctuations  in  supply  and  de- 
mand   114 

France,  volume  of  currency  iu .  191 

Free  trade,  argument  for 461 

Between  States 476 

Friction  of  exchange 62,  106 

Gold,  supply  and  demand 498 

Stock  of,  In  U.  S 497 

Government,  functions  of 453 

Greenbacks  of  U.  S 506 

Gresham's  law 413 


Hard  times. 


380 


Income  of  persons 359 

Corporate 301 

Expenditure  of 363 

Laws  of 365,  368 

Tax  upon 489 

Induction,  process  of 17 

Interest  an  element  of  cost 258 

Origin  of 88,  302 


PAGE 

Interest,  rate  of,  how  determined 

304,  306 

Relation  to  risk 310 

Why  paid 803 

International  trade 278 

Iron  ship-building  in  U.  S 477 

Irrigating  companies,  rights  of    81 


Jevons's  theory  of  value. 


202 


Knowledge  is  a  factor  in  pro- 
duction  27,  72 

Labor,  necessity  and  law  of 6 

Definition  of 48 

Employment  of 412 

Classification  of 95 

Organization  of 97 

Division  of 98 

Relation  to  capital 405,  408 

Fallacies  of 419,  472 

Competition  of  foreign..  .104,  467 

Laborer,  who  he  is 93 

Distinguished  from  capitalist  94 
Condition  of  his  prosperity. .  "93 
Improvement  in  condition. 888,  514 

His  waces 95 

His  efficiency 103 

Foreign  competitors 104,  467 

Labor-saving  improvements.. 99,  388 

Laissez-faire 443 

Land,  rent  of 241 

Ownership  of 79 

Fertility  of 244 

Laughlin,  demand  for  labor —  434 
Laws  of  nature,  definition  of  .16,  18 

Legal  tender,  money  as 151 

Loans  by  government 482 

Logical  processes 14 

Luxuries,  enjoyment  of 395 

Machinery,  functions  of 98 

Effect  on  laborers 388 

McLeod,  his  view  of  property. .     56 

Maltlmsian  theory 107,  112 

Man,  a  reasonable  being 23 

Managers  of  railways 255 

Of  business 254 

Manufacturing  capital 409 

Market,  definition  of 217 

Foreign 475 

Materials,  raw,  of  production.77,  233 

Mercantile  sj'stem 286 

Method  of  economics 9,  22,  31 

Mill,  demand  for  labor 434 


INDEX. 


547 


,_  PAOK 

Monetary  ratio 153,  499 

Money,  necessity  of 58,  145 

Paper ". 415,  503,  506 

Metallic 148 

Requirements  of 147 

Coinage  of 149,  153 

Credit  as 163,  189 

Purchasing  power 213,  345 

Value  of 226,  346 

Circulation  of 318 

What  kinds  preferred 418 

Fallacies 420 

Monometallism 152,  494 

Argument  for 496 

Monopolies,  nature  of 230,  238 

Classes  of 233 

Temporary 237 

Effect  of 239 

As  element  of  cost 259 

Mortgages 66 

Non-competing  groups.  117,  377,  392 

Occupations,  gains  in  different  253 

Organism,  the  social 5,  7 

Organization  of  labor 97 

Organizers,  their  functions.  101,  515 

Panics,  commercial 384 

Paper  money,  irredeemable,  law 

of  value 508 

Depreciation  of 226,  414,  507 

Displaces  metall ic  money.414,  507 

Patent  rights 233 

Political  economy,  its  field 10 

Its  logical  method 22 

Its  fundamental  hypotheses. .     23 

Its  leading  points 9,  31 

Its  nomenclature 47 

Its  processes 123,  128 

Population,  law  of  increase 108 

Malthusian  theory 107,  112 

Changes  in  occupation 139 

Requires  capital 400 

Poverty,  conditions  of 135 

Influence  of  charity  on 527 

Prices,  scale  of 207 

Absolute 209 

Variations  of.  1 876-84 211 

Relation  to  demand.. 217,  220,  850 

Of  breadstuff  a 248 

Effect  of  competition  of 250 

How  determined 263,  273 

Combinations  to  regulate 270 


Prices,  international. . .   278 

Relation  to  flow  of  currency..  386 

Production,  definition  of 57,  70 

Requisites  of "79 

Improvements  in 137 

Cost  of 257,  264 

Determined  by  demand 872 

In  different  countries 280 

Effect  of  taxes  on 290 

Total,  of  U.  S "  '  469 

Profits 25'^  202 

Progress,  marks  of 141 

Property,  its  relation  to  wealth 

49,  53,  56 

Mr.  McLeod's  view  of 56 

Prosperity,  conditions  of. .  .134,  358 

Protective  tariff 459 

Arguments  for. .461,  463,  467,  473 

Railways,  regulation  of 454 

Ratio,  monetary 152,  499 

Rent  of  land 241 

Relation  to  price 245 

Element  of  cost 257 

Reserve  of  banks 163 

Of  Bank  of  England 177 

Of  national  banks 175 

Retail  prices 248 

Revenue  of  government 479 

Risk, relation  to  rate  of  interest    310 

Savinp,  effect  on  labor 888,  897 

Sensitive  commodities 218 

Ship-building  in  America 477 

Silver,  supply  and  demand 498 

Price  of 154 

Coinage  of,  in  U.  8 .418 

Skill  in  production 72,  233,  261 

Smith.  Adam,  on  taxation 488 

Socialism 512 

Difficulties  of 520 

Specie  payments,  suspension  of  172 

Speculative  transactions 224 

Spencer,   Herbert,  progress  of 

society 141 

Standard  of  value 208 

Steam-transportation,  effect  of..  100 

Strikes,  effect  of 887,  521 

Supply,  definition  of 217 

Supply  and  demand  determine 

price 217 

Of  monopolized  products. 239,  271 

International 278 

Equal  to  demand 222 


548 


INDEX. 


Sustenance,  definition  of 83 


Taxation ; 290> 

Effect  on  production 

Practical  hints  on 

Effect  on  foreign  trade 

Taxes,  classification  of 

Expenditure  of 

On  income. 

On  production 

Telegraph  companies 

Telegrams,  price  of 

Trade,  international 

Balance  of 281,286, 

Effect  of  taxes  on. .  ..283,  290, 
Advantages  of 

Transformation  of  capital 


479 
290 
493 
293 

484 
482 
489 
290 
455 
276 
278 
297 
298 
288 
121 


Usury  laws •  •  -305,  511 

Utility,  its  relation  to  value 200 


Value,  definition  of 62,  199 

Measure  of 63,205,424 

Jevons,  theory  of 202 

Relation  to  human  needs 204 

Tabular  standard  of 210 

Of  money 226 

Volume  of  the  currency  155,187,  320 


Wage-fund 

Wages,  definition  of 

Absolute  measure  of 

Element  of  cost 

Effects  of  hard  times  on 

Effect  of  protective  tariff  on.. 

Relation  to  capital   

Walker,  classification  of  labor.. 

On  rent 

Wealth,  definitions  of 

Natural ?7, 

Inequalities  in • ... 

Wealthy  class,  functions  of.  397 


325 

95 

357 

257 

382 

467 

411 

95 

241 

48 

233 

513 

513 


WORKS  BY  THE  SAME  AUTHOR. 


POPULAR  ASTRONOMY.  By  SIMON  NEWCOMB,  LL.D.,  Profes- 
sor U.  S.  Naval  Observatory.  With  One  Hundred  and  Twelve 
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The  great  reputation  which  the  author  of  this  work  has  merited  and  enjoys, 
both  in  this  country  and  in  Europe,  is  a  sufficient  guarantee  of  its  excellence. 
...  He  has  dwelt  especially  upon  those  topics  which  have  just  now  a  popular  and 
philosophic  interest,  carefully  employing  such  language  and  such  simple  explana- 
tions as  will  be  intelligible  without  laborious  study.  Technical  terms  have  as 
much  as  possible  been  avoided.  Such  as  were  employed  of  necessity,  and  many 
that  occur  elsewhere,  have  been  fully  explained  in  a  copious  glossary  at  the  end 
of  the  book.  With  its  abundant  aid,  the  reader  cannot  fail  to  derive  both  pleas- 
ure and  entertainment  from  the  study  of  what  is  the  most  ancient  as  well  as  the 
most  elevating  and  inspiring  of  all  the  natural  sciences.  .  .  .  Professor  Newcomb, 
throughout  his  whole  volume,  preserves  his  well-known  character  as  a  writer  who, 
in  treating  of  scientific  subjects,  fully  understands  the  art  of  bringing  them  within 
the  range  of  popular  comprehension.  ...  It  is  fully  calculated  to  hold  the  atten- 
tion of  the  general  reader. — JV.  Y.  Tunes. 

Its  purpose  is  to  enlighten  that  great  mass  of  fairly  educated  people  who 
have  lost  the  astronomical  knowledge  that  they  once  possessed.  It  states  and 
explains  exhaustively  and  elaborately  the  latest  methods  of  investigation,  the 
latest  discoveries,  and  the  latest  general  development  of  this  majestic  and  almost 
infinite  science.  Great  thought  and  much  space  have  been  given  to  the  historical 
points  and  philosophical  aspects  of  the  science.  ...  In  the  treatment  of  weighty 
and  abstruse  scientific  subjects,  the  author  never  fails  to  bring  them  within  the 
range  of  the  average  popular  comprehension. — Boston  Pott. 

Professor  Newcomb's  aim  has  been  to  write  a  book  which  will  present  to  the 
general  reading  public  a  condensed  view  of  the  history,  methods,  and  results  of 
astronomical  research,  especially  in  those  fields  which  are  of  most  popular  and 
philosophic  interest  at  the  present  day.  For  the  accomplishment  of  this  object 
lie  has  avoided,  as  far  as  possible,  the  complication  of  the  narrative  and  argu- 
ments with  mathematical  formulas  and  scientific  technology,  and  has  endeavored 
to  give  the  reading  public  a  book  that,  while  being  exact  in  its  statements  and 
definitions,  will  be  popular  in  the  best  sense  of  the  word. —  Cincinnati  Times. 

THE  A  B  C  OF  FINANCE;  or,  The  Money  and  Labor  Questions 
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find  in  it  a  reliable  counsellor  and  teacher. — Boxton  Transcript. 

In  this  modest  but  useful  endeavor  the  author  has  unquestionably  succeeded. 
—  The  Nation,  N.  Y. 

An  admirable  treatise— clear,  concise,  instructive,  and  interesting. — Detroit  Pott 
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G.  Saintsbnry.  — LANDOR.    By  S.  Colviu.— DE  QUIXCEY.    By  D.  Masson. 
— LAMB.     By  A.  Aiuger.  —  BKNTLEY.     By  R.  C.  Jebh.  — DICKEXS.     By 
A.  W.  Ward.  —  GRAY.     By  E.  W.  Gosse.  —  SWIFT.    By  L.  Stephen. — 
STERNE.     By  H.  D.  Traill. — MACAULAY.     By  J.  C.  Morison. — FIELDING. 
By  Austin  Dobson. — SHERIDAN.     By  Mrs.  Oliphaut. — ADDISON.    By  W. 
J.  Courthope.  —  BACON.     By  R.  W.  Church.  —  COLERIDGE.    By  H.  D. 
Traill.     12mo,  Cloth,  75  cents  per  volume. 

GREEN'S  ENGLISH  PEOPLE.  History  of  the  English  People.  By  JOHN 
RICHARD  GREEN,  M.A.  With  Maps.  4  vols.,  8vo,  Cloth,  $2  50  per  volume. 
Complete  in  4  vols.,  8vo,  Cloth,  $10  00 ;  Sheep,  $12  00 ;  Half  Calf,  $19  00. 

GREEN'S  MAKING  OF  ENGLAND.  The  Making  of  England.  By  J.  R. 
GREEN.  With  Maps.  8vo,  Cloth,  $2  50 ;  Sheep,  $3  00 ;  Half  Calf,  $4  75. 

GREEN'S  CONQUEST  OF  ENGLAND.  The  Conquest  of  England.  By 
J.  R.  GREEN.  With  Maps.  8vo,  Cloth,  $2  50 ;  Sheep,  $3  00. 

HALLAM'S  MIDDLE  AGES.  View  of  the  State  of  Europe  during  the 
Middle  Ages.  By  H.  HALLAM.  8vo,  Cloth,  $2  00. 

HALLAM'S  CONSTITUTIONAL  HISTORY  OF  ENGLAND.  The  Con- 
stitutional History  of  England,  from  the  Accession  of  Henry  VII.  to  the 
Death  of  George  II.  By  HENRY  HALLAM.  8vo,  Cloth,  $2  00. 

KINGLAKE'S  CRIMEAN  WAR.  The  Invasion  of  the  Crimea :  its  Origin, 
and  au  Account  of  its  Progress  down  to  the  Death  of  Lord  Raglan.  By 
ALEXANDER  WILLIAM  KIXOLAKE.  With  Maps  and  Plans.  Four  Vol- 
umes now  ready.  12mo,  Cloth,  $2  00  per  vol.;  Four  vols.,  Half  Calf,  $15  00. 

REBER'S  HISTORY  OF  ANCIENT  ART.  History  of  Ancient  Art.  By 
Dr.  FRANZ  vox  REBER.  Revised  by  the  Author.  Translated  and  Aug- 
mented by  Joseph  Thacher  Clarke.  With  310  Illustrations  and  a  Glos- 
sary of  Technical  Terms.  8vo,  Cloth,  $3  50. 

ADAMS'S  MANUAL  OF  HISTORICAL  LITERATURE.  A  Manual  of 
Historical  Literature.  Comprising  Brief  Descriptions  of  the  Most  Im- 
portant Histories  in  English,  French,  and  German.  By  Professor  C.  K. 
ADAMS.  8vo,  Cloth,  $2  50. 

MAURY'S  PHYSICAL  GEOGRAPHY  OF  THE  SEA.  The  Physical  Ge- 
ography of  the  Sea,  and  its  Meteorology.  By  M.  F.  MAUHY,  LL.D.  8vo, 
Cloth,  $4  00. 

FLAMMARION'S  ATMOSPHERE.  Translated  from  the  French  of  CA- 
MILLE  FLA>IMARIOX.  With  10  Chromo-Lithographs  and  W5  Woodcuts. 
8vo,  Cloth,  $6  00;  Half  Calf,  $8  25. 


Valuable  Works  for  Public  and  Private  Libraries. 


CESNOLA'S  CYPRUS.  Cyprus :  its  Ancient  Cities,  Tombs,  and  Temples. 
A  Narrative  of  Researches  and  Excavations  during  Ten  Years'  Residence 
in  that  Island.  By  L.  P.  Di  CESNOLA.  With  Portrait,  Maps,  and  400 
Illustrations.  8vo,  Cloth,  Extra,  Uncut  Edges  and  Gilt  Tops,  $7  50 ; 
Half  Calf,  $10  00. 

VAN-LENNEP'S  BIBLE  LANDS.  Bible  Lands :  their  Modern  Customs 
and  Manners  Illustrative  of  Scripture.  By  Henry  J.  VAN-LENNEP,  D.D. 
350  Engravings  and  2  Colored  Maps.  8vo,  Cloth,  $5  00 ;  Sheep,  $6  00  ; 
Half  Morocco,  $800. 

LIVINGSTONE'S  ZAMBESI.  Narrative  of  an  Expedition  to  the  Zambesi 
and  its  Tributaries,  and  of  the  Discovery  of  the  Lakes  Shirwa  and 
Nyassa,  1858  to  1864.  By  DAVID  and  CHARLES  LIVINGSTONE.  Illus- 
trated. 8vo,  Cloth,  $5  00 ;  Sheep,  $5  50. 

LIVINGSTONE'S  LAST  JOURNALS.  The  Last  Journals  of  David  Liv- 
ingstone, in  Central  Africa,  from  1865  to  his  Death.  Continued  by  a 
Narrative  of  his  Last  Moments,  obtained  from  his  Faithful  Servants 
Chuma  and  Susi.  By  HORACE  WALLER.  With  Portrait,  Maps,  and  Il- 
lustrations. 8vo,  Cloth,  $5  00 ;  Sheep,  $6  00.  Cheap  Popular  Edition, 
8vo,  Cloth,  with  Map  and  Illustrations,  $2  50. 

BAKER'S  ISMAILIA :  a  Narrative  of  the  Expedition  to  Central  Africa  for 
the  Suppression  of  the  Slave-trade,  organized  by  Ismail,  Khedive  of 
Egypt.  By  Sir  SAMUEL  W.  BAKER.  With  Maps,  Portraits,  and  Illus- 
trations. 8vo,  Cloth,  $5  00;  Half  Calf,  $7  25. 

TENNYSON'S  COMPLETE  POETICAL  WORKS.  The  Poetical  Works 
of  Alfred  Tennyson.  With  numerous  Illustrations  by  Eminent  Artists, 
and  Three  Characteristic  Portraits.  8vo,  Cloth,  $2  00 ;  Gilt  Edges,  $2  50. 

CURTIS'S  LIFE  OF  BUCHANAN.  Life  of  James  Buchanan,  Fifteenth 
President  of  the  United  States.  By  GEORGE  TICKNOR  CURTIS.  With 
Two  Steel-Plate  Portraits.  2  vols.,  8vo,  Cloth,  Uncut  Edges  and  Gilt 
Tops,  $6  00. 

GENERAL  BEAUREGARD'S  MILITARY  OPERATIONS.  The  Military 
Operations  of  General  Beauregard  in  the  War  Between  the  States,  1861 
to  1865;  including  a  brief  Personal  Sketch,  and  a  Narrative  of  his  Serv- 
ices in  the  War  with  Mexico,  1846  to  1848.  By  ALFRED  ROMAN,  for- 
merly Aide-de-Camp  on  the  Staff  of  General  Beauregard.  With  Por- 
traits, &c.  2  vols.,  8vo,  Cloth,  $3  50 ;  Sheep,  $4  50 ;  Half  Morocco,  $5  50  ; 
Full  Morocco,  §7  50.  (Sold  only  ty  Subscription.) 

PRIME'S  POTTERY  AND  PORCELAIN.  Pottery  and  Porcelain  of  all 
Times  and  Nations.  With  Tables  of  Factory  and  Artists'  Marks,  for  the 
Use  of  Collectors.  By  WILLIAM  C.  PRIME,  LL.D.  Illustrated.  8vo, 
Cloth,  Uncut  Edges  and  Gilt  Tops,  $7  00 ;  Half  Calf,  $9  25.  (In  a  Box.) 

GIESELER'S  ECCLESIASTICAL  HISTORY.  A  Text-Book  of  Church 
History.  By  Dr.  JOHN  C.  L.  GIESELER.  Translated  from  the  Fourth 
Revised  German  Edition.  Revised  and  Edited  by  Rev.  HENRY  B.  SMITH, 
D.D.  Vols.  I.,  II.,  III.,  and  IV.,  8vo,  Cloth,  $2  25 ;  Vol.  V.,  8vo,  Cloth, 
83  00.  Complete  Sets,  5  vols.,  Sheep.  $14  50;  Half  Calf,  $23  25. 


Date  Due 


Library  Bureau  Cat.  No.  1137 


V.  B.  CLARKE  &  CARRl 

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